Fred Passer: The Vermont Pension Solution: Take Medication

This comment was written by Fred K. Baser is from Bristol and is a former state representative, small business owner and certified financial planner.

As lawmakers search for funds to fund their priorities in the next session, they might do well to reexamine pension plans for teachers and state employees.

State pension plans are severely underfunded. Last year efforts were made to rescue the underfunded schemes. In January, the Working Group on Pension Benefits, Design and Financing, set up by the legislature, presented its best ideas for plan revisions. Treasurer Beth Pierce and House Majority Leader Jill Kroenski have relayed these recommendations to the legislature.

The changes were powerful and designed to preserve pension plans and give hope that future contributions to the programs will be better controlled.

The task force’s recommendations were set aside after strong opposition from the two unions that represent the staff of these programs. Instead, some half-hearted 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 additional one-time $200 million from budget surpluses and federal dollars—to fund the programs.

This great contribution was their solution to the problem of lack of funding. Think of it like pouring a bucket of cold water over someone’s head to treat a high fever. One-time overfunding will not cure the patient.

Recent high inflation, increased future costs (health insurance premiums, expected benefit payments), along with disappointing investment returns on reserves, have mitigated last year’s half-billion-dollar effort. In fact, it is possible, even likely, that the actuaries will recommend an increase in the appropriation at the next session.

Pensions are a promise of a lifetime income payment to the employees who have earned it, once they retire. The state is also obligated to pay health plans for retired teachers and state workers. These health care plan costs are also included in the pension financing 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 set aside to fund these future retirement plan obligations and pay the benefits of current retirees.

There is a big gap between what the state possesses of these reserves and what is required to meet its obligations, and thus the lack of financing. General Fund pension allocations have accelerated rapidly in recent years to try to bridge this funding gap.

What is not said when discussing this issue is the impact of increased pension funding on dealing with other state priorities, not to mention the potential for returning dollars to Vermont taxpayers at lower taxes.

Let’s put the costs of state pension plans into perspective. Last year’s $300 million pension allocation was the fifth-largest public fiscal allocation in Vermont (this doesn’t include the $200,000 in federal and state surplus dollars). We have devoted more to retirement plans than to the General Fund for Higher Education and Natural Resources.

Pension plans cover about 42,000 participants (current and future retirees, figures taken from task force report). One must ask whether this increased budget allocation is justified given all the programs competing for limited resources from the state.

Having a pension is a valuable benefit worth preserving. There are ways out of this dilemma without ending the pension system. Implementing all of the task force’s recommendations would be an excellent start.

Mismanagement of these programs in the 1980s and 1990s, lower-than-expected investment returns, and demographic changes are the main causes of the current problems.

Information needed to change pension provisions is available to the legislature (click here). So is the case with predicting the future of the program if hard decisions are not made.

Democratic leaders, in their overwhelming majority, can take action to stop the escalation of pension costs. Or, our legislature could get in the way and risk more serious consequences for all of us in the future.

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