The gap between what Vermont owes current and future retired state employees and teachers, and what assets it has to pay them, has ballooned in the last decade, threatening not only the future of the state’s retirement plans, but also the state’s credit rating and other markers of its financial standing.
The dramatic increase in unfunded obligations in recent years is the upshot of flaws in the system that some say can be corrected only by making major changes in the state’s retirement benefits plans.
But State Treasurer Beth Pearce says the state is in the process of taking corrective action, which will right the ship eventually — though she concedes it will take time.
The funding gap for state pension programs has multiplied for both teachers and state employees.
Unfunded obligations in the teachers’ pension program, which was less than $400 million in 2008, had grown to $1.5 billion by 2017. For state employees, the unfunded portion of the pension program increased from $87 million in 2008 to $717 million in 2017.
Vermont is not the only state to see the assets of its public pension programs vastly outstripped by looming liabilities.
A report released in April by Pew Charitable Trusts found that state pension funds in the U.S. collectively have a $1.4 trillion deficit.
The report, an examination of state pension funding in 2016, the most recent year for which data was available, says “Many state retirement systems are on an unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the pension promises made to public employees.”
Vermont’s unfunded pension liability has not seen as dramatic an increase as many other states, but Joe Nation, a Stanford University professor who helped create the Pension Tracker tool, characterized Vermont’s statistics as “a little bit of good news.”
“It’s kind of like being on the Titanic and saying, but yeah, I have a first class ticket,” he said.
Nation said part of the problem has been that the public pension system in the United States has tended to operate according to a different set of standards from other countries.
Pension systems in the U.S., he said, assume a “very high rate” of return on investments, a uniquely American optimism that he said reminded him of a classic Clint Eastwood line: “You gotta ask yourself one question, do I feel lucky? Well do ya, punk?”
The real question, he says, is whether the projected rate of return is realistic. And if it isn’t, “You can get into trouble very quickly,” he said. “It doesn’t take much time for a system to become terribly underfunded.”
Many states, including Vermont, have tended to project rates of return for their pension systems at more than 7 percent, Nation said, while most financial experts would call closer to 6 percent more realistic.
David Coates, a retired managing partner at KPMG-Vermont and a member of the 2010 state commission tasked with tackling public retiree health benefit plans, says over-optimism in predicting rates of return is one factor in the current state of the state’s pension funds.
In the event that investments fail to live up to expectations, it is the state’s obligation to make up for the shortfall with higher annual contributions out of the general fund, Coates said. This can lead to squeezing out other items in the state’s budget.
Coates’ conclusion has been that the state needs to overhaul its public retirement system, and if it doesn’t, it risks damaging the state’s bond rating and its fiscal health.
“We need to make changes to the system, period,” Coates said.
Coates has suggested the state consider switching to a retirement system more in line with what is offered in the private sector — a defined contribution plan, like a 401(k).
He has advocated for keeping in place pension plans for employees currently in the system. However, new employees could be brought into a new defined contribution plan system, eventually phasing out the pension system.
Mark Crow, a director of the Vermont Business Roundtable, agreed with Coates that rosy growth projections for pension fund investments — projections that failed to materialize — has been a major factor in the dramatic increase in the amount the state has had to draw from the general fund to support its pension obligations.
Like Coates, Crow advocates following the private sector’s approach to retirement; defined contribution plans, he said, would “stop the hemorrhaging.”
The first challenge, Crow said, is to broaden awareness of the problems with the current system.
“At this point we’re just trying to get people to listen and to understand what the issue is,” Crow said.
State Treasurer Pearce said the present state of pension funding in Vermont is at least in part a result of chronic underfunding as far back as the 1990s.
Since 2007, both the legislative and executive branches have been committed to fully funding the state’s annual contribution to the pension funds, she said.
The state is making progress, she said, though she acknowledges there is a long way to go.
“You’re not going to turn these things around on a dime,” she said.
The state also reduced its projected rate of return on investments this year, from 7.95 percent to 7.5 percent.
Pearce said the state evaluates its portfolio of investments on a regular basis, and it always on the lookout for ways to secure better investment results.
Pearce said she has been looking into modifying employee retirement plans according to the private sector model, but a study conducted last year found that changing to a defined contribution plan likely would cost the state more, and would not address the unfunded liability issues.
“The bottom line for me is there are no quick fixes,” she said.
This article provided by NewsEdge.