With roughly a month to go before adjournment, Gov. Phil Scott is ramping up pressure on lawmakers to make changes to a pension deal the Legislature brokered with the unions that would be impacted.
A Senate-passed bill, S.286, would cost the state $200 million in one-time cash and require higher contributions from workers. Estimates indicate it would shave $2 billion from Vermont’s unfunded pension liabilities. But Scott on Tuesday argued it “doesn’t go far enough, and simply kicks the can down the road.”
“I’m concerned that we’re putting a more than $200 million Band-Aid on this without fixing the underlying problems,” the governor said at his weekly press conference.
Scott invited David Coates, retired managing partner of KPMG’s Burlington office — and a longstanding commentator on the pension — to outline his concerns. The reforms in S.286 were positive, Coates argued, but the estimated savings still relied on rosy assumptions about investment returns, and could be wiped out in an economic downturn.
“Recessions are not kind to the stock market. They aren’t kind to the economy, and they aren’t going to be kind to the state of Vermont — and in particular, our retirement systems,” said Coates, who sat on a 2010 state commission tasked with tackling public retiree health benefit plans. “So what do we do to prepare for that? S.286 doesn’t do it. It gets us a little bit into it, but not far enough.”
The governor is making two demands. First, Scott wants lawmakers to incorporate a risk-sharing provision, through which employees could adjust their contributions to the system based on the fund’s market performance. Second, he wants the inclusion of a “defined contribution,” or 401(k)-style retirement plan, as an option for new employees.
It remains unclear if Scott would veto the pension bill if lawmakers don’t cede to his demands. Asked on Tuesday if he would send S.286 back to lawmakers if they passed it as-is, he replied that that was “the multi-billion dollar question.”
Unions and Democratic leadership in the House and Senate said they’re deadset against making changes to the deal. And they argued that weeks out from adjournment is far too late for Scott to start making demands after sitting out over a year’s worth of debate and discussion about Vermont’s multi-billion dollar pension shortfalls.
Lawmakers began wrestling anew with the state’s growing pension debts last January, when State Treasurer Beth Pearce first proposed a series of benefit cuts after a reevaluation projected liabilities had grown by some $600 million.
At the time, Scott said he’d let lawmakers take the lead on finding a solution. Legislators last session ultimately created a task force to carve out a compromise, and the panel delivered its unanimous recommendations this January.
S.286 was the result. It has since passed the Senate unanimously — with Republican support — and is now winding through the House, although the lower chamber was not expected to make any significant adjustments.
“This is kind of a classic move that this particular governor does,” Senate President Pro Tempore Becca Balint, D-Windham, said in an interview Tuesday. “Which is, we do the work here in the Legislature — we invite all the stakeholders in, we do the committee process, which is how we pass legislation — and then when we seem to have a deal that the parties can get behind, he comes in with an 11th-hour proposal.”
Balint said it’s likely the Legislature would return to the pension in later years, and that she’s willing to send the governor’s ideas to the pension oversight committee for review. But she said she isn’t willing to reopen this particular deal.
“We’re not willing to jeopardize … what we see as a hard-won compromise,” Balint said. “And I really feel like it’s time for the governor to get on board.”
House Speaker Jill Krowinski, D-Burlington, echoed Balint, saying Scott has had “many opportunities throughout this entire process to advocate to lobby these policies.”
“To come in at the last minute with this all-or-nothing plan isn’t helpful,” she said. “We’re not going to stray from the proposal that we agreed to.”
Scott’s recent opposition is all the more surprising, critics argued, because a member of his team was at the table throughout the process. Department of Financial Regulation Commissioner Mike Pieciak sat on the pension task force and endorsed its recommendations, although Pieciak at the time said his vote shouldn’t be interpreted as a proxy for the governor’s view.
“We assume that he has Mike Pieciak’s number,” retorted Steve Howard, executive director of the Vermont State Employees Association, quipping that “we think there might be video of (Scott) standing next to Mike Pieciak over the summer and fall,” referring to the governor’s weekly press conferences.
The administration argues that a 410(k)-style defined contribution plan could help the state recruit workers who don’t want to work for state government for decades and prefer a more portable retirement plan. But both measures the governor is requesting would also shift significantly more risk to workers.
Pensions are what’s usually referred to as “defined benefit” retirement plans. An employer guarantees a certain benefit to employees in retirement, and if a pension fund underperforms, it’s up to the employer to make up the difference. With “defined contribution” plans — like 401(k)s — employers promise only a certain contribution to a worker’s retirement plan, and if a retirement fund doesn’t do well, it’s up to retirees to make it up.
The unions argue defined contribution plans are almost always a worse deal for workers.
“Retirement experts have been predicting for years a private sector retirement disaster — and it is a direct result of switching off defined benefit plans and turning them to 401(k)-type plans,” said Darren Allen, a spokesperson for the Vermont-National Education Association. “Most folks don’t have enough to retire on.”
The Vermont State Employees Association noted that only 30% of workers who are currently eligible for defined contribution plans choose them over the pension. And they argued that drawing new workers from the pension would raise the age profile of the plan, making it less sustainable.
If a third of classified employees were to choose a 401(k) plan, “the harm to the defined benefit plan’s funding would be huge — a reality you can bet is not lost on the State,” the union wrote in a recent newsletter.
Pearce has suggested that she, too, would like to see the pension deal go further, noting that it did not save the state quite as much as her original package of recommendations. But she’s also said she supports the bill as it stands — and is adamantly opposed to the inclusion of a new 401(k)-style plan for workers, which she said will do nothing to address the debts the system already owes.
Offering two systems could cost the state more to administer on its own, she said. And drawing workers — and their contributions — out of the pension fund could also make it harder to keep the fund healthy, she said.
“The active (employee)-to-retiree ratio would adversely impact the system,” she said.
The administration has not performed an analysis to show how much the governor’s proposals would save the state, Scott said Tuesday. Neither has Coates.
