State Treasurer Beth Pearce says Vermont will need to make “extraordinarily painful” cuts to retirement benefits for teachers and state employees in order to keep the state’s pension fund solvent.
According to Pearce, a number of factors have conspired to increase the so-called “unfunded liability” in the pension system — the gap between assets in the fund, and the cost of meeting pension obligations in the future.
In a report unveiled on Friday, Pearce urged the board that oversees public pensions in Vermont to close that gap by reducing or eliminating cost-of-living adjustments for future retirees.
“Unfortunately, there is really no other particular element of the pension plans that would get you to significant decreases [except the] issue of cost-of-living increases for employees in retirement,” Pearce said.
Pearce said the recommendation would not affect the more than 17,000 retirees currently drawing down pension benefits.
“They received an estimate of what their benefit would look like, they signed off on that … they are retired," Pearce said. "We don’t believe impacting their benefits is appropriate.”
But Pearce’s proposal would result in significant reductions in future cost-of-living adjustments for the approximately 8,500 employees working for the state of Vermont right now.
And it would eliminate cost-of-living adjustments entirely for nearly 10,000 public school teachers when they become eligible for retirement benefits.
"We think that would be unfair to our teachers, who have held up their end of the bargain and paid every single dollar that they've been asked to pay." - Don Tinney, Vermont NEA president
Don Tinney, president of Vermont-NEA, said the teachers’ union opposes the plan.
“We think that would be unfair to our teachers, who have held up their end of the bargain and paid every single dollar that they’ve been asked to pay,” Tinney said Friday. “That [cost-of-living-adjustment] has been part of the bargain — that as they retire, they know their pensions would keep up with the rate of inflation. So we don’t believe this adjustment should be made on the backs of teachers, who have devoted their entire lives to the service of the children of Vermont.”
Pearce, however, said the severity of the unfunded liability demands “painful” concessions.
Pension obligations have long been a thorn in the side for budget committees in the Legislature. But recent developments have exacerbated the problem.
An “experience review” of Vermont’s pension system conducted last year concluded that a combination of demographic factors, such as life expectancy and staff turnover, will increase the projected cost of pension payouts over the next 20 years.
And actuaries recently lowered the expected annual rate of return for Vermont’s $5 billion pension fund, from 7.5% to 7%.
Pearce said increased pension costs and lower fund returns have increased the unfunded liability across the pension system by more than $600 million. And she said in order for the state to eliminate that unfunded liability without making any changes to pension benefits, lawmakers would have to appropriate an additional $96 million annually to the pension fund.
Pearce said budget increases of that magnitude aren’t a feasible option in the current fiscal climate.
“The ability to continue to have these increases and sustain them within the available dollars is a problem,” Pearce said. “They’re putting more and more pressure on our … ability to pay for … other needed services in the state.”
Tinney said the Vermont-NEA will be encouraging lawmakers to take a different course: close the unfunded liability by increasing taxes on Vermont’s highest-income households.
“We think it’s time that the wealthiest Vermonters pay their fair share,” Tinney said. “It’s no secret that the wealthiest Vermonters had their tax bills lowered by millions of dollars with the Trump tax cuts, and let’s look at where that money went and why we should not expect the millionaires to pay their fair share here.”
"The ability to continue to have these increases and sustain them within the available dollars is a problem. They're putting more and more pressure on our ... ability to pay for ... other needed services in the state." - Beth Pearce, State Treasurer
Pearce’s report to the pension system’s Board of Trustees includes other recommendations as well, including increasing employee contributions, and changing the formula used to determine monthly pension benefits.
Pearce said forcefully in the report that Vermont should not consider abandoning a defined-benefit system.
Pearce called the reporting a “starting point," and said Friday the unions that represent teachers and state employees will continue to have a seat at the table, as her office considers other proposals.
“We’re going to continue to look at other alternatives and options,” Pearce said. “These are the recommendations as they stand now, recognizing that we have a long way to go before this is completed and a solution is generated.”
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