Editor’s note: This commentary is by David Coates, a retired managing partner at KPMG — Vermont and a member of the Vermont Business Roundtable. He was a member of the 2010 state Commission on the Design and Funding of Retirement and Retiree Health Benefits Plans for State Employees and Teachers. He lives in Colchester.
[V]ermont’s unfunded liability for the state workers and teacher pensions and retiree health care benefits (OPEB) increased in 2015 by over $500 million. As of June 30, 2015, these liabilities total $3.8 billion versus $3.3 billion in 2014, a 15 percent increase in one year. By contrast, Vermont’s economy grew at 2 percent over the previous year.
This is a remarkable amount considering general fund revenues are expected to be $1.7 billion this fiscal year. In other words, Vermont would have to dedicate over two years of our revenues to just balance the amount due state workers and teachers as of June 30, 2015, per the actuary’s report. As you read below, even this $3.8 billion is likely understated.
Some of the assumptions used by the actuary appear to be very liberal, according to at least one rating agency. For example, the discount rate used to value the earned pension benefits of the state workers and teachers is assumed to be around 8 percent. If the state were required to use the more conservative number, which the private sector uses, that liability would instantly grow to over $5 billion.
The good news is that the state is now making the Annual Required Contribution (ARC) recommended by the actuary for at least the pensions. Remember these payments are based on what is likely an understated unfunded liability given the questionable assumptions mentioned earlier. Using the actuary’s numbers, the annual increase in the state budget to pay the ARC is 5 percent compounded. Again, not encouraging given the 3 percent revenue growth anticipated going forward. This will continue to put additional pressure on other state spending priorities, leaving the Legislature to either cut programs or raise taxes.
Because it appears that the unions have more influence with the majority of the General Assembly than the state’s taxpayers, I often wonder where they believe their fiduciary responsibility rests … the unions or the taxpayers.
Now more bad news. With respect to the retiree health care benefits (OPEB), the state is only paying the actual health care costs incurred and not paying the amounts prescribed by the actuary (unlike the pensions) of $60 million annually. These are not being paid for the simple reason the state does not have the resources. This inaction guarantees the unfunded liability will continue to grow.
I continue to offer up solutions to rein in this $3.8 billion-plus of debt the state has incurred, but for whatever reason it does not seem to resonate in Montpelier, other than with the state treasurer who has made multi-million dollar decreases to these liabilities since she took office. But, she can’t do it alone!
My suggestions include offering all new state workers and teachers defined contribution plans (401k type like the private sector) and eliminating retiree health care benefits for them as well. The state workers and teachers currently in the system retain their existing benefits. As this possibility becomes more remote with each passing year, voters must know that more draconian changes will eventually need to be implemented.
Interestingly, the unions don’t offer their employees the same benefits they demand from the state … namely a defined benefit pension plan. Why? My guess is for the same reasons we need to eliminate it at the state level: they are very expensive, pose great financial risk, and to pay for them the unions would have to raise dues (taxes) on its members.
Because it appears that the unions have more influence with the majority of the General Assembly than the state’s taxpayers, I often wonder where they believe their fiduciary responsibility rests … the unions or the taxpayers.
While I have been writing about this retirement tsunami for about 10 years, do not think that a day of reckoning will not come. As we have seen around the country, when the Legislature is eventually forced to deal with this issue, it will have much more devastating impacts on Vermont’s economy (as it has had in other parts of the country) than by simply facing reality and making some necessary adjustments now.
