This commentary is by Fred K. Baser of Bristol, a former certified financial planner, founder of Bristol Financial Services, and a former state legislator.
You’re in the midst of an 18-month drought and one day a thunderstorm comes through and dumps over 4 inches of rain. Is the drought over? Yes, according to Darren Allen of Vermont’s NEA and Steve Howard, the executive director of the Vermont State Employees Association.
They drew this overly optimistic conclusion when noting the recent state surpluses reported by Vermont’s Joint Fiscal office. This pot of gold would rescue their organizations’ underfunded pensions.
Today’s teacher and state employee pension problems are serious and have developed over a long period of time. Multiple factors are the cause. A few more million dollars of the state’s current surplus will not solve the problems.
In addition to Misters Howard and Allen representations, Lisa Duffort got information from Rep. Copland-Hanza and state Treasurer Beth Pearce in her VTDigger article Aug. 5. Both the treasurer and Rep. Copland-Hanza understand the gravity and causes of the current pension funding problems.
The pensions currently have a $5 billion liability. This means that the state is 5 billion dollars short of having enough money to meet the long-term pension benefit promises. In addition, the Legislature is appropriating over 10% of our general fund budget to keep the pension plans afloat. These general fund appropriations are forecasted to rise in the future.
This trend is unsustainable and damages the state’s ability to deal with other priorities.
There was also an implication, by Mr. Howard, that the pension funds investment return of 24.6% in the 2021 fiscal year meant that people were overreacting to the pension problems. Treasurer Pearce correctly noted investments have bad years along with the good.
Consider the possibility of the pension investment fund having a 10% decline next year, fiscal 2022. In actual dollars, this leads to a two-year return of about 9% for 4.5% annual average. This is a lot lower return than the 7% annualized return that the actuaries have been instructed to use in their contribution calculation.
This point leads me to three suggestions on structural changes to the current pension picture.
- The current 7% projected annual return is “too rosy a return assumption.” Using a 5% return assumption is more prudent. This reduces the risk of future underfunding. If you assume a higher rate for future returns, you invest fewer dollars, and overly ambitious return assumptions are one of the reasons for the current underfunding dilemma. Getting to 5% over time is prudent.
- Every pension has trustees who are responsible for administration and proper operation of the plan. The teachers and state employees pensions have six trustees responsible for the plan. Apparently, these trustees do not control the annual contribution amount. The government initiated underfunding that occurred in the 1990s demonstrates this fact.
We should create a board of trustees that has a minority of members with ties to state government or the unions. These trustees should have a fiduciary responsibility to fund these plans to meet their obligations. Government should advise, not dictate.
- Finally, the teachers and state employees plans should be looked at separately with forward-looking plan changes made to each, including union concessions. Vermonters, who fund the plans with tax dollars, have been doing their fair share.
The actions needed to heal our underfunded teachers and state employee pension plans are not complicated. The treasurer recommended sound pension plan changes last winter. The Legislature responded with reasonable legislation.
The two unions, exercising their considerable influence over the Democratic Party members, cried foul, and instead of reform, a task force was created to “study” the issues. Let’s hope politics isn’t part of the fix.
