A detailed examination of the underlying actuarial reports reveals a more complex picture of systems still facing substantial unfunded liabilities and demographic pressures.

[Correction: In an earlier edition of this story, VDC (not Compass Vermont) mistakenly used the Vermont Public logo as a graphic. We regret the error.]

by Compass Vermont

Vermont State Treasurer Mike Pieciak recently announced that the state’s public pension systems have reached their highest funding levels in nearly a decade, crediting reforms enacted in 2022 and strong investment returns. The announcement highlights significant progress, but a detailed examination of the underlying actuarial reports reveals a more complex picture of systems still facing substantial unfunded liabilities and demographic pressures.

The Headline Numbers

Vermont operates three major public retirement systems: one for teachers, one for state employees, and one for municipal workers. According to actuarial valuations completed for fiscal year 2025, the Vermont State Teachers’ Retirement System (VSTRS) now stands at 63.4% funded, while the Vermont State Employees’ Retirement System (VSERS) has reached 73.2% funded.

These percentages represent the ratio of assets currently held versus the total obligations owed to current and future retirees. The teachers’ system holds approximately $3 billion in assets against nearly $4.8 billion in liabilities, leaving an unfunded gap of about $1.75 billion. The state employees’ system has roughly $2.9 billion in assets against $3.9 billion in liabilities, with an unfunded gap of approximately $1.06 billion.

The Vermont Municipal Employees’ Retirement System (VMERS) stands at 74.3% funded, marking what the Treasurer called “its first positive trend since 2021.”

Understanding the Recovery

These funding levels represent a significant improvement from crisis lows reached around 2020, when the teachers’ system had fallen to approximately 50.9% funded. The recovery stems primarily from two sources: legislative reforms passed in Act 114 in 2022 and strong investment performance by the Vermont Pension Investment Commission (VPIC).

The pension funds earned a 10.7% return in fiscal year 2025, well above their assumed 7% annual target. Over the past decade, VPIC has averaged a 7.2% return, and over 15 years, 7.7%.

However, these funding ratios are calculated using what actuaries call the “Actuarial Value of Assets,” which smooths investment gains and losses over five years to prevent wild swings in required contributions. The actual market value of both the teachers’ and state employees’ systems is slightly higher—about 65.3% and 74.6% respectively—meaning strong recent returns haven’t been fully reflected in the official ratios yet.

The $5.8 Billion Savings Claim

The Treasurer’s announcement emphasized that reforms are “projected to save Vermont taxpayers $5.8 billion over the next 20 years.” This figure requires careful interpretation.

According to legislative documents explaining Act 114, this represents avoided costs rather than actual budget reductions. The savings calculation has two components: approximately $4.1 billion from paying down pension debt faster (thereby avoiding 7% compounding interest charges), and roughly $1.7 billion from investment returns on newly created healthcare benefit trust funds.

These projections depend entirely on two major assumptions: that the state maintains its accelerated payment schedule for the next 20 years, and that the pension investments continue averaging 7% annual returns. Any deviation—whether from future legislatures reducing payments or from market downturns—would diminish or eliminate the projected savings.

Healthcare Benefits: A Massive Remaining Challenge

While pension funding has improved, retiree healthcare benefits—known as Other Post-Employment Benefits or OPEB—remain severely underfunded. The Treasurer highlighted achieving “record” funding levels of 16.6% for the state plan and 13.6% for the teachers’ plan.

These percentages, while accurate, obscure a stark reality: both systems remain more than 80% unfunded, with a combined unfunded liability exceeding $2 billion. Prior to 2023, Vermont paid healthcare costs for retirees on a “pay-as-you-go” basis, meaning the funding level was effectively zero. The current levels represent the first two years of setting aside money in advance.

Making matters more challenging, actuarial reports show that healthcare cost projections were recently revised upward due to faster-than-expected medical inflation. The required annual contribution for the teachers’ healthcare plan jumped nearly 25% for fiscal year 2027, even as assets grew.

Demographic Pressures on the Teachers’ System

One significant concern absent from the Treasurer’s announcement involves the changing demographics of the teachers’ retirement system. Current actuarial data shows the system now has 10,772 retired members and beneficiaries drawing pensions, compared to just 10,526 active teachers contributing to the fund.

This inversion—more retirees than active workers—creates what actuaries call “negative cash flow.” Contributions from current teachers are no longer sufficient to cover monthly pension checks, forcing the system to rely on investment returns and legislative appropriations. This makes the system more vulnerable to market downturns, since it must sell assets even in down markets to pay current benefits rather than holding investments for long-term growth.

What Employees Gave Up

The 2022 reforms described as “shared responsibility” involved substantial concessions from public employees. According to details of Act 114, active employees saw their pension contribution rates increase, with higher earners now paying up to 7.15% of salary.

The reforms also modified cost-of-living adjustments, capping inflation protection for many retirees or applying it only to the first $24,000 of benefits. New employees face longer vesting periods—up to 10 years of service—before qualifying for pension benefits at all.

When initially proposed, these changes faced significant opposition. A 2022 report noted that workers felt “betrayed” and “abandoned” by the proposals. However, union leadership ultimately supported the final legislation, which the Treasurer’s announcement frames as collaborative consensus.

Investment Strategy and Risk

The entire recovery trajectory depends on VPIC’s ability to maintain its 7% average return over the next 13 years until the systems are projected to reach full funding in 2038. While the commission has historically met this target, recent history shows volatility: the funds lost 9% in fiscal year 2022, requiring multiple years of above-average returns to recover.

To achieve 7% returns in current markets, VPIC has allocated significantly to private equity investments, which delivered 18.8% returns in fiscal year 2025. However, these assets are less liquid than publicly traded stocks and bonds, potentially creating challenges if the systems need to rapidly sell holdings to pay benefits.

The systems also assume long-term inflation of 2.3%, an assumption that recent economic conditions have tested.

The National Context

The Treasurer’s announcement noted that both the state and teachers’ systems received recognition from the Public Pension Coordinating Council, a professional organization. These awards acknowledge that Vermont has an approved plan to achieve full funding, though they don’t certify that the systems are currently in strong financial condition.

By national standards, Vermont’s funding levels remain below average. Many well-funded state pension systems maintain ratios above 80% or 90%.

What Happens Next

Vermont has committed to a 13-year path toward full pension funding by 2038, contingent on maintaining current contribution levels and achieving investment targets. Annual actuarial valuations will track progress, with the Joint Fiscal Office and pension oversight committees monitoring results.

Future legislatures will face ongoing pressure to maintain accelerated payment schedules even during budget constraints. Any significant market downturn or period of below-target investment returns would extend the timeline to full funding and potentially require additional contributions from taxpayers or employees.

The healthcare benefit trusts will require steady funding growth for decades to reach adequate levels, with the challenge compounded by medical cost inflation that continues outpacing general inflation. Each year’s actuarial valuation will adjust required contribution levels based on healthcare cost trends and investment performance.

For Vermont’s public employees and retirees, the systems have stabilized after years of decline, but the path ahead requires sustained fiscal discipline, favorable market conditions, and continued political commitment to funding promises made to public servants.