Republican governor-elect Phil Scott remains interested in shifting public-sector pension plans from “defined benefit” to “defined contribution,” an idea Vermont labor unions say is a nonstarter.
Well, he’s interested in his own elliptical way.
“Yeah, sure, we want to take a look at that,” he told Seven Days last week. “We’ll continue to have that conversation and debate the issue and make our case for why that might be good to consider for future hires. But we’ll take a look.”
Commitment, Phil Scott style: “Have that conversation,” “debate the issue,” “consider,” and, not once but twice, “take a look.” All in one paragraph.
As long as Scott plans to “take a look” at that, Democratic state Treasurer Beth Pearce plans to fight back.
Currently, members of the Vermont State Employees’ Association and Vermont-National Education Association — the state’s largest public-sector unions — enjoy defined benefit pensions: They are guaranteed certain retirement benefits. In a defined contribution system, employer and employee pay into a retirement account, but no specific benefits are promised.
Scott touts defined contribution as a way to cut the cost of public sector pensions. But Pearce argues that it will reduce pension security without saving money — not in the short term, not in the long term.
To understand her argument, you have to know the financial history of the state’s pension plans.
Every year, the treasurer prepares an “annual required contribution” (ARC) to each plan: the Vermont State Employees’ Retirement System and Vermont State Teachers’ Retirement System.
For fiscal year 2018, Pearce recommends $52 million in state funding for VSERS and $88.4 million for VSTRS, a total pension obligation of $150.4 million. That’s a big bite — and a 3.6 percent increase over last year’s ARC.
Here’s the rub: Of that $150.4 million, only $22.4 million is the cost of current obligations. The rest — a stunning $128 million — is required to make up for past shortfalls.
The biggest resulted from two events: the Great Recession of 2008, which hammered the pension funds’ investments, and a period of underfunding VSTRS that lasted from 1991 to 2007. Since then, the state has paid its ARC in full every year, but the 16 years of underfunding took its toll in lost investment income.
As a result, says Pearce, roughly 80 percent of next year’s ARC is effectively “the mortgage payment on our unfunded liability.” Those mortgage payments will continue for years to come.
Governor-elect Scott wants to switch to defined contribution pensions for new employees, while holding current workers and retirees harmless. That might reduce current costs, but it’s a relatively small portion of the state’s obligation.
Because current workers and retirees would retain their defined benefits, the state would still owe those “mortgage payments.” The savings would be minimal at best.
But even those savings are a mirage, according to Pearce. With unified state pension funds, the money is professionally invested. Costs are lower, returns are higher. The current cost of VSERS is 2.88 percent of the state’s payroll price tag. The current cost of VSTRS is a rather astonishingly low 1.33 percent.
The state of Vermont already has defined contribution pension plans for some non-union employees. They cost 7 percent of payroll. “[For VSEA members] you’d be replacing 2.88 percent with 7 percent,” concludes Pearce. “And you’d still have the unfunded liabilities.”
There go the savings, in Pearce’s view. And notwithstanding her partisan label, the treasurer’s fiscal acumen is respected on all sides.
This is all without considering the human dimension of making retirement less secure for thousands of Vermonters. Pearce expresses this in green-eyeshade terms: Vermont’s population is getting older, and retiree spending is a major economic driver. Retirees without guaranteed pensions will be much tighter with their dollars.
“I did some numbers a couple of years ago,” says Pearce, “and 75 percent of teachers and 79 percent of state employees stay in Vermont and pay taxes in Vermont. Having reliable income is important.” Not only to retirees, but to the state’s economy and treasury.
Over the past 10 years, there’s been a bipartisan commitment to fully funding the ARC while making reforms to trim the unfunded liability and bend down the cost curve. Members of both major unions have made significant concessions; all are contributing more to their pension funds, and teachers have agreed to a higher retirement age.
“Employees have stepped up to the plate,” Pearce notes. “The legislature has stepped up to the plate in funding the ARC. We need to give this time to work out.”
Speaking of ARC, we asked the governor-elect if he would make a commitment to the full $150.4 million for FY2018.
His predictable not-quite answer? “We’re going to make every effort to do so.”
Good to know.
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Is it four for four now, your portraying our governor-elect in a negative light?
When are you going to get to your other pet peeve.. those whose who disagree with you about industrial wind?
It is so dang predictable/boring.
Fair Game or Eeyore’s Soapbox?
Wow Seven Days. Wow. I can’t believe you pay this idiot.
Thank you Beth Pearce for showing us the money and warning against this plan.
Walters turns a story about the problem of what to do about the state’s large unfunded pension liability into a partisan attack on Governor-elect Scott. Great job, Walters. Note to Walters: Scott inherited this problem, he did not create it.
And at the end you chastise Scott for not having a plan to pay the $150 million the states owes. Why aren’t you chastising Shumlin and the Democratic legislature, who owned this problem for the last 6 years???
Oh my here we go again! FYI Treasurer Pearce was elected this election cycle by huge numbers. Does that not say WE Vermonters,for the most part trust our VT. Treasurer Beth Pearce to do what is right!! WE who have retired from VT. State employment will not be soon getting rich on our retirement. If there is a successful campaign by the new
Administration in traction launched to Change retirement benefits from a defined benefit to defined contribution…the numbers will change considerably for retirees.
The majority of VT retirees stay here…spend their money here…pay taxes here….with a change in retirement to defined contribution my biggest fear is that the number of Retirees fleeing VT. Will increase because.. .it will be easier to live outside VT. than within!
Please Gov.Elec. Scott listen to our VT. Treas. Beth Pearce….she is a knowledgeable,
Bright, caring person who genuinely cares about Vermonters and the State they live in.
She always does a boodle of research, consulting, calculations before making any decisions. This would serve others well to follow her example!
Joanie Maclay
Retiree.
It’s important to note since moving to Seven Days the author has reported multiple stories with traditional sarcasm and drip that diminished him in his social media inter-action previously. Anyone who is active on Twitter knows the ugly that the VPO spews regularly and often his record skips when he is focused on Governor-elect Phil Scott. Pension funding aside, there is a huge partisan atmosphere within the Vermont democratic party and the party has used its surrogates in recent time to create issues prematurely of our soon to be Governor even though they refuse to give him a chance to govern before rending judgment.
Never trust a Democrat when it comes to money, or when it comes to telling any truth.
From a budgetary perspective you can’t really compare the contribution the state makes to employees 401(k)-style accounts to the ‘normal cost’ contribution the government makes to fund benefits earned by employees under a DB plan this year. Two reasons: first, the employer’s 401(k) contribution is fixed as a percentage of pay, while the DB contribution varies based on the assumed rate of return on the plan’s investments. If that assumed return is lowered, as it probably should be — most pension investment analysts believe that a 6% return is more reasonable — then the cost will rise. Second, if the DB plan’s investments fail to achieve their assumed returns this year, then next year the state will have to make an additional payment to pay off the unfunded liabilities accrued this year. That’s obviously happened in the past and generated high costs for the budget. Those unfunded liabilities, and the additional payments to cover them, can’t happen with a 401(k)-style pension plan. So it’s just not an apples-to-apples comparison.
Oh my, here we go again. The horrors of someone daring to criticize a policy idea of Governor-Elect Golden Boy. And refuting it with evidence, I’m even more aghast. Looks like some commentators have their feelings hurt that their Dream Boat’s idea is not fiscally sound.
John Walters is a true liberal..BIAS!!!!..He must think Shummy was a great Governor..NOT!!!
There a lot of retired Vermonters who has left Vermont because they can’t afford to live in this now liberal state..Vermont has become a very expensive state..Everything is high, taxes are outrageous..when Vt was a Republican state you could live a very comfortable life..not anymore..
By Walter’s standards this is just plain vanilla snark. It will get worse later.