Vermont Daily Spotlight: A sudden focus on Vermont’s pension shortfalls presents a big challenge for new Democratic leadership. Their actions will not only have consequences for state financials, but for their own party as well.

by Jack Borbee

Earlier this year, Treasurer Beth Pearce dropped a pipe bomb. After years of suggesting that the Vermont’s public pension system for teachers, state workers and municipal employees retirees was on track, she announced the need for major restructuring as the system is in danger of becoming insolvent. 

This comes after years of warnings by Republicans that suggested the pension system was not on solid footing, including Former Governor and Treasurer Jim Douglas, who has publicly supported transitioning to a less-costly defined contribution (DC) plan. Pearce’s Republican opponent in the last election, Carolyn Branagan, made the pension issue a central issue of her campaign. Though Branagan lost the election, she succeeded in bringing the seriousness of the pension crisis to the forefront.  

While there are many factors as to why Vermont’s public pensions are facing nearly $6 billion in unfunded liabilities, a major one is that for years the Vermont Pension Investment Committee (VPIC) predicted excessively high rates of return on investments for assets held in the pension system – as high as nearly 8 percent – while performance almost always fell short of expectations, often far short. This was more than just poor judgement at work; there was a political incentive to make these unrealistically high forecasts: the higher the rate of return on investments, the less General Fund money was required to make up the difference to keep the pensions whole, so more could be spent on other things. During the Shumlin administration, this game of “oopsie” gave lawmakers cover to shift tens of millions of dollars away from fulfilling pension obligations and into other pet projects. These discrepancies compounded, and over the just past single year the unfunded liability grew by roughly $600 million. 

Pearce’s sudden revelation prompted House Democrats to step up and finally deal with the issue. But instead of inviting the Vermont National Education Association (VTNEA) and Vermont State Employees Association (VSEA) to the table, Party Leadership decided to hold meetings behind closed doors. When they made their plan public, the unions were not happy.

House Speaker Jill Krowinski (D-Burlington) announced the Democrats’ pension plan, which called for some cuts to benefits, higher contribution rates for employees, and delayed retirements. Current retirees and those five years from vesting would not be affected. The plan was panned by unions – not only for the proposal itself, but for not having been allowed a seat at the table.

When Politics and Economics Clash, Politics Always Wins

It’s no secret that the VTNEA and the VSEA are arguably the most powerful special interest groups in Vermont politics, and they almost universally back Democrats at election time. They made this fact abundantly clear. 

As a result, Senate Democrat leaders and Lieutenant Governor Molly Gray quickly and publicly  distanced themselves from the plan, and Krowinski, under pressure, pulled it from consideration altogether – kicking the issue to next year’s legislative session, much to the dismay of Pearce, who believes that without reform now, union members will lose their “defined benefit” pensions and be forced to accept “defined contribution,” like a 401K, plan. 

But, here’s where the politics gets really interesting. 

House Progressives seized on the Democrats’ internal chaos and the rupture between the party and its most powerful union allies. Representative Brian Cina – a Progressive from Burlington – introduced an amendment to a non-pension related bill that would have increased income taxes on high earners (a 3% marginal rate on income over $500,000), the revenue from which would have been dedicated to paying down state’s pension shortfall and mitigate the needed cuts. Cina’s proposal largely echoed what the Unions were calling for themselves: tax the rich to fix the problem. 

Democrats were between a rock and a hard place. They could give the Progressives a victory and appease the unions. But the idea of higher taxes on high income earners is not a new one, and powerful Democrats were eyeing that potential revenue for — echoing the priorities of the Shumlin years — projects other than pensions, such as environmental initiatives and childcare expansions. 

Cina called for a roll-call on his amendment, which failed with just  20 “yes” votes out of the 150 members of the Vermont House of Representatives. All but one Progressive voted for Cina’s amendment, while, unsurprisingly, no Republicans supported it. However, House Democrats — the overwhelming majority of whom had been endorsed by the VEA and VSEA in the last election — voted no. 

Vermont Daily dug into the roll call results. Ultimately, more than 75 percent of House Democrats voted against Cina’s proposal to raise income taxes to offset certain pension cuts. Yet, 85 percent of House Democrats were publicly endorsed by either (or both) the VEA or the VSEA–who were supportive of this amendment–in 2020. In other words, House Democrats voted against the powerful unions that had supported their campaigns.

Meanwhile, nearly 90 percent of Progressives voted for the amendment–even though half of them had been rejected by the VEA or VSEA when they rolled out their endorsements in 2020. Ironically, a far greater proportion union-rejected Democrats and Progressives voted for the amendment than did union-supported members. Perhaps, this was to prove to the unions that they had made the wrong call in 2020 and that they should support these members in the next election cycle.

For Progressives, it was a political victory, showing the unions that they could rely on them, but not on the traditional Democrats in the Legislature.

Much To-Do About 2022

The political credibility Progressives bought with labor leaders is not the only factor working in their favor. By delaying the pension issue to next year, Krowinski is not only kicking the can down the road, she’s setting it up for a time closer to the 2022 elections. This issue will be much more ripe in voters minds, and union members in particular will be more likely to recall whatever actions the Legislature takes next session.

Some are already expressing concerns about the effect this will have on the ballot box. Democrat Representative Bob Hooper of Burlington – a former union leader who voted for the amendment – is predicting union members will sit out or refuse to help in the next election.

Whatever happens between the Democrats and the Progressives remains to be seen, but the real losers in this political fracas are taxpayers and rank and file union members. As noted above, the unfunded liabilities in the state pension system are growing exponentially, and kicking the can down the road another year because of political gamesmanship and a lack of resolve will only  make the problem more expensive to solve, and anything resembling the status quo less likely to be maintained.