Beth Pearce, the state treasurer, says a plan to rebuild the teachers’ retirement fund is working.
The fund lost about 20 percent of actuarial value from 2008 to 2014. Over that period, the retirement system went from an 80.9 percent of actuarial value in 2008 down to 59.9 percent in 2014.
Pearce and the Vermont Legislature took action to shore up teachers’ retirement pensions in 2014. Up to that point, payouts for retiree health care costs were rapidly eroding the fund. Officials devised a plan that required the state to pay more into the fund and put some of the burden for medical retiree health care costs on teachers and local school districts.
The annual actuarial contribution recommended by the state’s independent actuary and the Teachers’ Retirement System Board of Trustees is $76,102,909.
That figure is comprised of $10,384,106 of normal cost to fund the system, and $65,718,803 of unfunded liability, she said. The governor’s budget fully funds the actuarial recommendation for the new fiscal year starting July 1, 2015.
Projections from the state treasurer’s office show that the unfunded liability will begin to decline around 2022 based on the current funding plan.
“In this difficult budget year, we need to continue to maintain that fiscal discipline and make timely contributions,” Pearce told the House Education Committee. “Failure to do so will cost the taxpayers more in the long run.”
Three drains on teacher retirement cited
Pearce said three things contributed to the alarming — and costly — decline of the teachers’ retirement fund in Vermont: underfunding, the Great Recession (which hurt Wall Street returns on investment) and a pay-as-you-go approach to retiree health care costs.
Last year, the state established a dedicated fund for teacher retiree health care costs, and other steps were taken to help reduce the liability in the pension trust fund, Pearce explained.
The plan will “right the wrongs of the past” and will save $480 million in interest through 2038, Pearce said.
Appropriations of $10.5 million from the 2015 General Fund budget were directed to teacher health care, as well.
Teachers are contributing more to the fund. New hires and teachers with five or fewer years must pay 6 percent of their income (up from 5 percent) toward the pension fund, and teachers who are working under federal grants must have pension costs paid by the federal government, Pearce said.
Of this year’s requested state contribution of about $76 million, about $3 million will come from federal grants at the local level, Pearce said.
“To me, it’s an issue of transparency,” Pearce said. Going forward, she explained, those costs will be “100 percent paid for by the federal government.”
The pension fund was hit hard by the recession. “We took some losses there,” Pearce said.
And in the 1990s and early 2000s, Pearce said the system suffered from “considerable underfunding.”
“This was especially true of the teachers’ retirement system, which was characterized by sizeable underfunding of the actuarially recommended contributions through 2006,” noted Pearce. “Not surprisingly, the funded status of the teachers’ plan was negatively impacted.”
In 2007, the state began to make the full actuarial contributions once again to reverse that trend, Pearce said, but the Great Recession hit the system in 2008 and 2009, causing further setbacks.
Lastly, the way retiree health care was paid for (the state doesn’t have a separate fund for medical costs, and was paying for health care out of the corpus of the retirement fund) was “a drag on the pension system.”
“Essentially the retiree health care costs were put on the credit card. The system was not sustainable,” explained Pearce. “As retiree health care took a bigger bite out of available funds, the teachers’ pension funded position deteriorated.”
The State Treasurer’s Office, the Shumlin administration, the General Assembly, the Vermont NEA and other educational constituencies adopted a long-term financial remedy last year. A Retired Teachers’ Health and Medical Benefit Fund was established that is dedicated to exclusively paying retired teacher health and medical benefits.”
In a “problem statement” about what had been happening earlier, Pearce explained, “Just as with an individual home mortgage, there is an interest cost associated with borrowing to cover healthcare costs. Since pension funds are expected to earn interest in the range of 7.75 percent, this borrowing, or ‘retrospective’ funding mechanism, is costing the taxpayer significant dollars. For every $1 in premium not paid today, it will cost the taxpayer $3 over time.”
“In 2010 and 2011, both the teachers and State employees agreed to a series of benefit changes [teachers] and contribution increases [State and teachers’ plans] that lowered the cost to the taxpayer by roughly $20 million per year,” Pearce explained. “The State has also adopted a commitment to fund the contribution levels recommended by the State’s independent actuary and these amounts are now consistently included in the Governor’s budget and adopted by the General Assembly.”
