by Ben Kinsley
After nearly a decade of stubbornness, the Vermont Legislature is poised to take meaningful action. The pension policy recommendations that emerged from the House Government Operations Committee last week are surprisingly comprehensive despite their 11th hour appearance.
Teachers and state employee’s unions have summarily condemned the proposal.
The themes were common throughout the public hearings: bemoaning the speed with which the legislature is moving, decrying “promises broken” and questioning why teachers and state employees are being asked to shoulder this burden. Unions have called for a summer study committee to look at this issue more closely.
The reality is that reform has to happen this year. Our retirement liability has grown $1,000,000,000 in the last twelve months and it’s only going to grow more. This will require more draconian cuts from beneficiaries and a more burdensome tax increase on Vermonters.
This issue will only grow more complicated for legislators. Next year is an election year. Increasing pressure from both employees and taxpayers could make the situation untenable.
Politics aside, the House proposal strikes a balance between the competing interests of taxpayers and public employees. The proposed changes to employee contributions, eligibility, and risk-sharing would reduce the fund’s combined liabilities by about $500M. Additional pre-funding from taxpayers will reduce the unfunded liabilities by close to $1B, if you assume a 6.5% rate of return. This reasonable compromise doesn’t require either group to shoulder the entire cost of fixing the problem. While Campaign for Vermont is not tied to the specific mechanisms used in the House proposal, we do believe that both taxpayers and employees must contribute towards fixing this issue.
It’s still crummy, we know. No one wants to ask employees to pay more. The generous retirement benefits, particularly the retiree health care benefits, are a powerful recruiting tool for our state workforce. We have even suggested in the past that we should pay our teachers more in order to compete with neighboring states. We must ensure there actually is a pension fund available when our current state employees and teachers retire. To guarantee that, changes must be made.
We would prefer to focus on new hires for the solution. The scope of the problem has now grown beyond that.
If Vermont had acted ten years ago when David Coates and others originally brought this issue to the Legislature, the VSEA, and the NEA, we could have avoided any changes for existing employees. The same goes for recommendations made five years ago by the Vermont Business Roundtable and Campaign for Vermont.
But now the deficit is twice as large as it was in 2015. Adjusting benefits for new hires isn’t enough. We must make structural changes.
CFV recommends moving new hires to a defined contribution plan, supported by considerable educational opportunities for employees, and eliminate the risk-sharing portion of the House proposal. Existing employees didn’t sign up for that. Consideration should also be given to increasing the health care plan contribution level, while still remaining under the ‘going rate’.
We recommend level-setting the contribution rates for existing employees. It makes no sense to have five different varying rates, as we do now. In keeping with the House proposal, employees near retirement should absolutely be exempted from any changes. The current bill exempts employees within five years of retirement but increases the vestment period to ten years. We should either make the vestment period change match the exemption period, or there should be a special exemption for the vestment period to cover employees caught in this situation.
In addition to contribution changes and taxpayer investment, Vermont also must look at governance – the whole reason we are in this mess. While all other actuarial assumptions should continue to be set by the Boards of Trustees, setting of the rate of return assumption should be under the authority of Vermont Pension Investment Committee (VPIC) in consultation with professional and independent actuaries. This is essential given the history of high expectations and low performance.
While extensive training opportunities exist and have been effectively utilized for both the Trustee Boards and VPIC, statutes should be updated to require that the boards and committees implement a comprehensive education policy. We need educated professionals making these sorts of decisions. We also need to hire independent consultants who can give valuable perspective on investment decisions that these boards are making.
Stress-testing of our benefits systems does happen now, but we need to turn up the volume. We recommend moving to annual stress testing for the next five years and then moving to every other year until we are confident in the stability of the system.
VPIC should also become independent from the Treasurer’s office and report to the legislative finance committee as well. The Treasurer can remain on the VPIC board but shouldn’t vote unless to break a tie. And, in keeping with our push for open government, all VPIC members should sign an attestation disclosing conflicts of interest.
We will have more specific governance recommendations in the coming weeks. For now, employees and taxpayers must return to the table to find a path forward. This cannot be a one-sided solution.