This commentary is by Fred K. Baser of Bristol, a former state representative, a small business owner and a certified financial planner.
As legislators search for money to fund their priorities this coming session, they may do well to reexamine the teachers and state employees pension plans.
The state pension plans are terribly underfunded. Last year an effort was made to rescue the underfunded plans. In January, a Pension Benefits, Design and Funding Task Force, created by the Legislature, presented its best ideas for plan revisions. Treasurer Beth Pearce and House Majority Leader Jill Krowinski moved these recommendations forward to the Legislature.
The changes were robust and were designed to preserve the pension plans and bring hope that future contributions to the programs would be better controlled.
The task force recommendations were put aside after strong pushback from the two unions representing the employees of these programs. In its place, a few tepid revisions to the plans were enacted, and the Legislature approved an unprecedented amount of money — half a billion dollars, $300 million from the general fund plus an extra one-time $200 million from budget surpluses and federal dollars — to fund the programs.
This significant contribution was their solution to the underfunding problem. Think of it like pouring a cold bucket of water on someone’s head to cure a high fever. One-time overfunding will not cure the ill patient.
Recent high inflation, which increases future costs (health insurance premiums, and projected benefit payments), combined with disappointing investment returns on reserves, have mitigated last year’s half-billion-dollar effort. In fact, it’s possible, even likely, that actuaries will recommend an increased allocation in the coming session.
Pensions are a promise to pay lifetime income to vested employees, once they’ve retired. The state also has an obligation to pay retired teachers’ and state workers’ health plans. These health plan costs are also included under the pension funding formula.
The formula used to tabulate the lifetime income benefit uses the employee’s last years of income along with years of service. The state has a pool of money that is dedicated to funding these future pension plan commitments and to pay current retirees benefits.
There is a huge gap between what the state has available in these reserves and what is needed to meet its obligation, thus, the underfunding. General fund pension allocations have been accelerating rapidly in recent years to try to address this funding gap.
What goes unsaid when discussing this issue is the impact increasing pension funding is having on dealing with other state priorities, to say nothing of possibly returning dollars to Vermont taxpayers with lower taxes.
Let’s put the costs of the state’s pension plans in perspective. Last year’s $300 million pension allocation was Vermont’s fifth-largest general fund allocation (this does not include the $200,000 from federal dollars and state surplus). We dedicated more to the pension plans than our combined higher education and natural resource general fund allocations.
The pension plans cover about 42,000 participants (current and future retirees, figures taken from the task force report). One must ask if this growing budget allocation is warranted considering all the programs vying for limited state resources.
Having a pension is a valuable benefit, one worth preserving. There are ways out of this dilemma without terminating the pension system. Enacting all the task force recommendations would be an excellent start.
Poor management of these programs in the 1980s and ’90s, lower-than-projected investment returns, and demographic changes are a major cause of the current problems.
The information needed to change the pensions provisions is available to the Legislature (click here). So is the prognosis for the program’s future if tough decisions are not made.
Democratic leaders, with their super majority, could take action to halt the escalating pension costs. Or, our Legislature could kick the can down the road and risk more severe consequences for all of us in the future.
