People & Places

'Painful' cuts proposed in pensions for teachers, state employees

Beth Pearce
State Treasurer Beth Pearce warns that the state's pension fund needs immediate attention. Photo by Mike Dougherty/VTDigger

Vermont Treasurer Beth Pearce is recommending a reduction in pension benefits for teachers and state employees, following a new analysis that projects the system’s unfunded liability growing by about $600 million.

In a report submitted to the Legislature on Friday, Pearce suggested a series of changes that would require active employees to contribute more and take a lower payout. Her recommendations would not impact retirees currently receiving benefits.

The proposal reduces cost-of-living adjustments for state employees and eliminates them altogether for teachers. Under the plan, employees would contribute more and wait longer to draw benefits. And the salary amount used to calculate a retiree’s benefit would be lower. 

“These recommendations are painful, and this report is not submitted lightly, but action is needed to continue to provide retirement security for all our employees,” read a statement released by the treasurer’s office.

The state’s unfunded pension obligation has long been an albatross around the Legislature’s neck, consuming ever-growing shares of the General Fund. The problem is mostly the result of the state underfunding the system for decades, particularly in the 1990s, and overly optimistic assumptions about investment returns.

Following two new analyses of the pension system’s current and future performance, the pension board recently lowered the expected annual rate of return on the funds from 7.5% to 7%.

Actuaries now project that the pension system’s unfunded liabilities — the gap between what’s owed to current and future retirees and projected assets in the fund — have ballooned by another $600 million. That’s on top of the $1.5 billion shortfall that was projected beforehand in the teacher’s pension alone.

To make up for it without cutting benefits, the treasurer’s office says lawmakers would have to kick in an extra $96 million a year to meet the state’s obligations.

Pearce’s report does include one note of hope: With a Biden administration and Democratic majorities in the U.S. House and Senate, state governments believe that additional aid is forthcoming to help with the pandemic and the resulting economic crisis. If that money comes without too many restrictions, “paying down the state’s debts with a portion of these funds should be a priority,” the treasurer wrote.

At a virtual town hall held Wednesday with Vermont teachers, Pearce cast her proposals as an effort to save the system. Even lawmakers who have historically supported pensions are “talking about extreme measures,” she said, including converting the retirement system from a “defined benefit” to a “defined contribution” plan. 

Defined benefit plans, like pensions, guarantee employees a particular benefit upon retirement. Defined contribution plans, like 401ks, do not.

“We have to act, and we have to act now. And I can't think of a worse time, you know, in terms of the pandemic, but we really do need to have this conversation,” Pearce said.

About 1,000 educators tuned in to the Town Hall, according to Vermont-NEA spokesman Darren Allen. Nearly 200 submitted questions

Pearce has long been a staunch defender of defined benefit plans. But while union leaders said that while they do not doubt the Treasurer’s sincerity, they will nevertheless look for alternatives. 

“We certainly appreciate and respect Treasurer Pearce’s commitment to the defined benefits pension system. We're absolutely on the same page when it comes to the importance of preserving a strong and healthy pension system,” said Vermont-NEA president Don Tinney. “We're not in agreement with the approaches she's proposing to save it.”

Cuts in the pension system would not have been welcome in a normal year, but in the middle of the pandemic, when most teachers are working in-person, it “feels like a slap in the face,” Tinney said.

“There's no doubt that the fund needs more revenue. And we see that that revenue can be generated by asking the wealthiest among us to pay their fair share,” he added. That could include an income tax surcharge, he said, on those making over $400,000 or $500,000 a year.

Steve Howard, executive director of the Vermont State Employees Association, said the union wants to protect “a sustainable retirement system,” while also being fair to people who have “dedicated their lives to public service, operating under one set of rules, and planning their lives around that.”

“Nobody's ecstatic about it — any of it — including the treasurer. But we are also determined to protect the defined benefit pension plan from the folks who would want to attack the pension and create less retirement security for state employees,” he said.

Howard said the union would explore “every possible way” to sustain the pension, including by pushing for an income tax surcharge dedicated to paying down the unfunded liability.

The Treasurer’s report has revived fears among the state employees and teachers unions that Gov. Phil Scott might make a push to shift the pension systems to “defined contribution” plans.

Asked Wednesday about the Treasurer’s then-forthcoming report, Jason Maulucci, Scott’s press secretary, said the governor’s office had not yet been briefed on Pearce’s recommendations but looked forward to “working collaboratively with the Legislature and the Treasurer on her proposal and this important work.”

There were 8,443 active state employees and 7,268 state retirees in the system as of June 2019, according to the treasurer's office. The state reported that there were 9,862 active teachers and 9,514 retirees at that time. 

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Lola Duffort

About Lola

Lola Duffort is a political reporter for VTDigger, covering Vermont state government, the congressional delegation and elections. She previously covered education for Digger, the Concord Monitor in New Hampshire and the Rutland Herald. She has also freelanced for the Miami Herald in Florida, where she grew up. She is a graduate of McGill University in Canada.

Email: [email protected]

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