By Guy Page
(Editor’s note: this report includes material sourced directly, and often verbatim, from a weekly update provided by the Campaign for Vermont.)
S286, reforming the underfunded public pension system, has passed the Senate and will be discussed in the House Government Operations Committee this week.
Not for lack of trying by a Franklin County senator, the Senate version does not include what many observers believe is critical to longterm success of the pension fund: defining state workers’ and teachers’ pension contributions without guaranteeing specific benefits. The current system defines benefits which have proven costly to maintain, resulting in a huge deficit.
On March 30 Sen. Randy Brock (R-Franklin) introduced an amendment to S286, the public pension reform bill, on the Senate Floor that would allow for new hires to make a choice between defined contribution and defined benefit plans.
The Vermont State Employees Association has been opposed to offering a defined contribution plan for years. A defined contribution system is in place for exempt (elected and appointed) employees. The state wouldn’t need to stand up a new program, just give access to non-exempt employees.
The Chairwoman of the Senate Government Operations Committee, Jeanette White (D-Windham), said that the Pension Benefits Task Force discussed offering a defined contribution plan but decided it best to focus on what was in place for state employees and teachers already. She said that the newly formed Joint Pension Oversight Committee could pursue defined contribution plans if they so choose. The Senate voted not to accept the amendment offered by Senator Brock.
On April 1, Senator Finance Chair and Caledonia County Democrat Jane Kitchel presented an amendment that was focused on amending the Cost of Living Adjustment (COLA) language in the bill. It provided for incremental increases in COLA – as the plan becomes healthier. They are hopeful that by 2038 COLAs will move from 50% of GDP to be more on-par. A roll call was taken and the amendment adopted 28 – 0.
The bill is expected to reduce Vermont’s long-term unfunded retirement liabilities for state employees and teachers by approximately $2 billion by prefunding other post employment benefits, modifying the pension benefit structure, and making additional state and employer contributions into the retirement systems.
Here is a brief overview:
- This bill contains $200M in one-time General Fund appropriation in FY2022 to the pension systems to pay down unfunded liabilities
- $75 million to the Vermont state employees’ (VSERS) retirement system.
- $125 million to the Vermont state teachers’ retirement system.
- The bill also contains $13.3M one-time Education Fund appropriations in FY2022 to begin prefunding health care benefits for retired teachers.
- No changes to the benefits of current retirees, beneficiaries, or terminated vested members are being proposed.
- Employee contribution rates increase to 35% for active members of both systems.
- Modifications to the cost-of-living-adjustments formula for all employee groups, plus changes to other terms of the pension benefits for VSERS, Group C and D
- State commits to ongoing additional payments of $50M towards the unfunded liabilities in both systems.
State Treasurer Beth Pearce testified to House Government Operations Committee in support of S.286. She views this bill as a “very good step forward and we appreciate the work of the Pension Task Force.” However, she sees a need for some more work and will be working with retirement boards in the coming weeks, particularly on the Cost of Living Adjustment (COLA) issues.
This is important. Consider the difference between a ‘defined-benefit plan’ and a ‘defined contribution plan’.
First, let’s understand that the term ‘plan’ is another word for a ‘savings account’. Money is invested into the account and distributed to the employee when the employee retires. The savings account might be invested in stocks, bonds, real estate trusts, treasury bills, gold, silver, etc. – in order to maximize the rate of return earned by the investment until the employee begins to receive it. This occurs in both ‘defined-benefit plans’ and ‘defined contribution plans’.
Here’s the difference. And it’s this difference that is important to understand.
In a ‘defined-benefit plan’, the employer guarantees the amount of the ‘benefit’ the employee receives from the plan.
In a ‘defined contribution plan’, the employer guarantees the amount the employer ‘contributes’ to the plan.
The difference is huge. Again, in a ‘defined-benefit plan’, the employer guarantees the amount the retired employee receives.
In a ‘defined contribution plan’, once the employer contributes to the plan, the employee determines how the money is invested. And the investment strategy may or may not provide more money to the retiree depending on the investment the employee makes.
In this case, ‘defined benefit’ or ‘defined contribution’, the employer is the State. In other words, the taxpayers are the employer. And in a ‘defined benefit plan’, the taxpayers elect representatives, who in turn, hire investment managers, ostensibly to maximize the rate of return on the money in the savings account.
But in a ‘defined contribution plan’, the employee hires the investment manager – AND accepts responsibility for the rate of return when the money in the savings account is invested.
Now for the crux of the comparison.
When the money in the savings account is invested, is it invested in such a way that guarantees a specific rate of return?
The answer is NO. At least not for the typical period of time the savings account exists before its distributed, which can be 30 years or more. Yes, the money can be invested in 30-year bonds or an annuity that guarantees a specific rate of return. But every year the employee works, an additional amount of money is invested in the savings account. And it has to be invested at that time. And the rate of return on the bonds or annuities changes, year in and year out. Sometimes the rate of return increases. Sometimes it doesn’t. And no one can predict these rates of returns. NO ONE!
So, ask yourselves this. If no one can predict the rate of return on these investments, why do taxpayers agree to pretend they can predict it? No other investment manager, anywhere, makes that guaranty. The standard investment disclaimer is: ‘Past performance is no guaranty of future results’. And yet, Vermont taxpayers continue to make this guaranty.
My guess. They don’t know any better. And they listen to their State legislators, who, more often than not, receive campaign contributions from those same special interest groups (the employees) – who receive the guaranteed benefit.
When I asked my local State legislator why she agreed to ‘pretend’ she can guaranty a rate of return when no other investment manager does so. Her answer: – “… thanks for your reply. I appreciate hearing your perspective. Big learning curve for me.”
I didn’t vote for her. But a lot of other fools did. And that, as they say, is the rest of the story.
Thank you for the detailed explanation.
Solved nothing. NOTHING. Just a fancy-schmancy kick of the can dressed up in happy talk P.R.
The VTNEA and the VSEA have invested wisely in this legislature…and once again the taxpayers get screwed in this long-running problem. There are WAY TOO MANY state employees and teachers in VT (the teachers are really state employees too).