Thanks to historic levels of federal stimulus spending, Vermont suddenly has more money at its disposal than it ever has before. For public-sector labor unions, who are trying to stave off the prospect of deep pension cuts as lawmakers contemplate new ways to tackle the system’s growing debts, the timing could not be better.
Anticipating great news last week from the state’s economists, the Vermont-National Education Association fired off a press release. Unprecedented budget surpluses, the state’s largest union argued, could go a long way toward solving Vermont’s pension problem.
“It’s right in line with the governor’s admonition that he never wants to spend one-time money on ongoing things,” said Darren Allen, the spokesperson for the teacher’s union. “A pension’s unfunded liability is something you tackle when you have unexpected windfalls. Because it frees up money elsewhere.”
A soaring stock market, meanwhile, has led to historic investment returns of 24.6%, pension fund managers reported last month. Assets under management grew by $1.1 billion in the fiscal year that ended June 30. For context: The funds have not seen returns that good since 1985, according to Vermont State Treasurer Beth Pearce.
Between the investment returns and the surpluses, Steve Howard, the executive director of the Vermont State Employees Association, said there is a “Mack Truck”-sized hole in the “argument that the sky is falling, that we’re in a crisis, that the pensions are on the verge of collapse.”
But the treasurer, for her part, cautions against getting too excited. Pension funds have good years and bad years, after all. And other factors — notably, demographics and retirement patterns, account for a huge part of the system’s unfunded debt.
A new valuation will be completed in October, Pearce said, which should provide better information about how much recent returns actually affected the funds’ long-term outlook.
“Without having that, it’s premature to posit what that variance is going to look like and how that might impact the decision-making,” she said.
Pearce said she does plan to recommend that lawmakers and the governor put some of Vermont’s projected surpluses into the system, although she hasn’t yet decided how much. And she remains steadfast in her belief that structural changes remain necessary.
Rep. Sarah Copeland Hanzas, D-Bradford, who co-chairs the pension task force charged with suggesting a pathway to reform, remains adamant that employees will need to accept cuts. A popular slogan from the unions — “a pension is a promise” — misunderstands the problem, she argued.
“A pension should be a mutually agreed upon system to ensure retirement income for people who work in the public service sector. But it can’t be a bottomless pit,” she said.
Between the four funds that pay for retirement income and health care benefits for state and school employees, Vermont’s unfunded pension liabilities now total more than $5 billion. The state is technically already on payment plan to make the funds whole, but that payment schedule is getting increasingly onerous to pay, and now consumes well over 10% of the state’s general fund.
The problem is in large part the doing of former Legislatures and governors, who shorted pension contributions for decades, most acutely in the 1990s. But other factors also contribute, including too-rosy assumptions about returns and the state’s aging demographics.
A more recent valuation, done in 2020, concluded that the gap between the system’s assets and its future obligations were actually some $600 million larger than expected. This precipitated a proposal by Pearce, and later House lawmakers, to cut benefits and ask employees to pay in more. Workers fiercely fought both, and lawmakers ultimately relented and struck a summer task force to study the problem.
Asked about Vermont’s newfound wealth, she was quick to point to competing priorities. Lawmakers are contemplating ambitious school finance reforms that might require short-term tax breaks to ease the transition, she said. Environmental advocates will pitch climate resiliency projects. The child care crisis is not getting better on its own.
Still, Copeland Hanzas said there was a “good case to be made” for steering some of the state’s one-time windfall toward pensions — but only if unions make concessions that would see their members shoulder some of the pain of reform.
“The benefits relative to the employee contributions and employer contributions are not set up for sustainability right now,” she said. “So I can’t go to the [House] speaker or the chair of appropriations and say ‘Give me a big slug of money so that I can plug this leaking hole,’ when there’s 15 other holes that are being left.”
The task force is still largely in the throat-clearing and agenda-setting part of the process. It will probably look at concrete options sometime in September and land on tentative recommendations by late October or November, Copeland Hanzas said. Public hearings will be scheduled once there are draft proposals for the public to react to, she said.
Asked if the governor would support putting some of this year and next year’s forecasted surpluses toward paying down the system’s debts, Jason Maulucci, his spokesperson, instead pointed to one-time money already recently allocated to the pensions.
The fund dedicated to health benefits for retired state employees got an extra $52 million when the most recent fiscal year closed with a $200 million surplus. And another $150 million in general fund dollars were set aside in the last session by lawmakers to put toward the funds once the task force agrees on a plan for reform.
And, like Copeland Hanzas, Maulucci suggested that the forecasted surpluses might be better spent on the other matters competing for the state’s attention.
“Even though this year the Governor proposed historic investments to combat climate change, expand our housing stock, build out broadband, address infrastructure needs, and more, we know it will not be enough to address these and other critical issues,” Maulucci wrote.
