“Yeah, sure, we want to take a look at that,” he told Seven Days last week. “We’ll continue to have that conversation and debate the issue and make our case for why that might be good to consider for future hires. But we’ll take a look.”
Commitment, Phil Scott style: “Have that conversation,” “debate the issue,” “consider,” and, not once but twice, “take a look.” All in one paragraph.
As long as Scott plans to “take a look” at that, Democratic state Treasurer Beth Pearce plans to fight back.
Currently, members of the Vermont State Employees’ Association and Vermont-National Education Association — the state’s largest public-sector unions — enjoy defined benefit pensions: They are guaranteed certain retirement benefits. In a defined contribution system, employer and employee pay into a retirement account, but no specific benefits are promised.
Scott touts defined contribution as a way to cut the cost of public sector pensions. But Pearce argues that it will reduce pension security without saving money — not in the short term, not in the long term.
To understand her argument, you have to know the financial history of the state’s pension plans.
Every year, the treasurer prepares an “annual required contribution” (ARC) to each plan: the Vermont State Employees’ Retirement System and Vermont State Teachers’ Retirement System.
For fiscal year 2018, Pearce recommends $52 million in state funding for VSERS and $88.4 million for VSTRS, a total pension obligation of $150.4 million. That’s a big bite — and a 3.6 percent increase over last year’s ARC.
Here’s the rub: Of that $150.4 million, only $22.4 million is the cost of current obligations. The rest — a stunning $128 million — is required to make up for past shortfalls.
The biggest resulted from two events: the Great Recession of 2008, which hammered the pension funds’ investments, and a period of underfunding VSTRS that lasted from 1991 to 2007. Since then, the state has paid its ARC in full every year, but the 16 years of underfunding took its toll in lost investment income.
As a result, says Pearce, roughly 80 percent of next year’s ARC is effectively “the mortgage payment on our unfunded liability.” Those mortgage payments will continue for years to come.
Governor-elect Scott wants to switch to defined contribution pensions for new employees, while holding current workers and retirees harmless. That might reduce current costs, but it’s a relatively small portion of the state’s obligation.
Because current workers and retirees would retain their defined benefits, the state would still owe those “mortgage payments.” The savings would be minimal at best.
But even those savings are a mirage, according to Pearce. With unified state pension funds, the money is professionally invested. Costs are lower, returns are higher. The current cost of VSERS is 2.88 percent of the state’s payroll price tag. The current cost of VSTRS is a rather astonishingly low 1.33 percent.
The state of Vermont already has defined contribution pension plans for some non-union employees. They cost 7 percent of payroll. “[For VSEA members] you’d be replacing 2.88 percent with 7 percent,” concludes Pearce. “And you’d still have the unfunded liabilities.”
There go the savings, in Pearce’s view. And notwithstanding her partisan label, the treasurer’s fiscal acumen is respected on all sides.
This is all without considering the human dimension of making retirement less secure for thousands of Vermonters. Pearce expresses this in green-eyeshade terms: Vermont’s population is getting older, and retiree spending is a major economic driver. Retirees without guaranteed pensions will be much tighter with their dollars.
“I did some numbers a couple of years ago,” says Pearce, “and 75 percent of teachers and 79 percent of state employees stay in Vermont and pay taxes in Vermont. Having reliable income is important.” Not only to retirees, but to the state’s economy and treasury.
Over the past 10 years, there’s been a bipartisan commitment to fully funding the ARC while making reforms to trim the unfunded liability and bend down the cost curve. Members of both major unions have made significant concessions; all are contributing more to their pension funds, and teachers have agreed to a higher retirement age.
“Employees have stepped up to the plate,” Pearce notes. “The legislature has stepped up to the plate in funding the ARC. We need to give this time to work out.”
Speaking of ARC, we asked the governor-elect if he would make a commitment to the full $150.4 million for FY2018.
His predictable not-quite answer? “We’re going to make every effort to do so.”