The intractable problem of underfunded pensions

The announcement in January by State Treasurer Beth Pearce that the state pension funds for teachers and state employees were grossly underfunded and that action had to be taken to make the plans sustainable alarmed all Vermonters, but most especially teachers and state employees who are counting on those funds for their retirement. Her recommendations for plan changes included painful changes to pension benefits, including increasing the retirement age, increasing employee contributions, and lowering the payouts. Teachers and state employees reacted immediately to protect the benefits they had earned by contacting legislators to plead their case. This issue quickly became the dominant topic, rivaling and intertwining with the budget in legislative deliberations. As such, it touches all Vermonters and deserves a closer look at the facts and figures.

In the 1990s the Legislature cut back on the appropriations to the pension funds under the assumption that investment returns would continue to exceed the actuarial predictions. Over the years this contributed to about a third of the current $3 billion unfunded liability in the pension funds for teachers and state employees. Other contributing factors include an aging workforce with the number of active teachers/employees roughly equal to the number of retirees, increased longevity of retirees, and the consistently low returns on investment experienced since the “great recession” of 2009. The revised actuarial estimate this year added another $600 million to the pension system’s unfunded liabilities in this year alone.

The Legislature does not manage the pensions or dictate the investment strategy, but we are taking the lead to bring stakeholders to the table to come up with a solution. Vermonters need the unions representing employees, the Governor and the Treasurer to come to the table as well. Between 2016 and 2020 the annual contributions from the taxpayer-supported state General Fund to the pension funds increased from $184M to $303M, while the teacher/employee contributions increased from $59M to $76M. The House Government Operations Committee has been considering not only the recommendations of the Treasurer but also alternative approaches to save the defined benefit model.

The Legislature has already stepped up with a significant increase in funding for pensions this year. The FY22 budget that was recently passed by the House contains an appropriation of over $300 million for the pension funds. This represents an increase of roughly $100 million over the actuarial required contribution last year. While federal American Rescue Plan Act (ARPA) stimulus funds cannot be used or applied to the pension system directly, they can be used to free up General Fund dollars to make a significant pension investment. Another $150 million in General Fund dollars have been set aside for this purpose, for a total FY22 contribution approaching half a billion dollars.

Late last week Speaker Jill Krowinski announced that the House Government Operations Committee would push forward with much-needed pension governance reforms and create a task force to work over the summer to gather stakeholder input and recommend structural reform to the pension systems. The governance changes are key to solving the pension crisis. These reforms will increase the level of professional expertise of those managing the pension funds and take the politics out of decision-making at the Vermont Pension Investment Committee (VPIC), which consists of employer and employee representatives. They will streamline the decision-making process around changes to actuarial assumptions, require more frequent experience studies, and enhance transparency around investment fees. Both the new governance structure and the pension task force need to maintain representation and participation from key employee and employer stakeholders.

Defined benefit public pension plans, when properly designed and managed, are the most affordable way to provide secure income in retirement. The Legislature is working to ensure the sustainability of the plans in a way that protects not only the benefits that employees and retirees earned but also the Vermonters whose taxes contribute to the pension funds and are increasingly under pressure to shore up the funds each year.

I welcome your emails or phone calls at (802) 233-5238. This article and others can be found at my website.


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Scooter MacMillan, Editor