Scott wants lawmakers to take the lead on looming pension problem

State Treasurer Beth Pearce has pitched a solution to the state's massive state and teachers’ pension problem, albeit reluctantly. She has proposed cutting benefits and requiring employees to pay more into the system. 

Unsurprisingly, the state’s public sector unions are stridently opposed to the idea, and have pitched their own fix: tax the rich.

The governor, meanwhile, has passed the buck to the Legislature.

Gov. Phil Scott “is eager to work” with lawmakers on finding solutions to Vermont’s long-term pension problem, according to his finance commissioner, Adam Greshin. But Scott plans to let them take the lead.

“The governor does not intend to present a plan to the Legislature,” Greshin said.

House Speaker Jill Krowinski, D-Burlington, said the state could ill afford “to continue to kick the can down the road” on the subject, though she said a workgroup of House lawmakers had only just started to “look under the hood and kick the tires at these different proposals and policy levers.”

Krowinski expressed frustration with Scott for his indirect approach to the mounting problem.

“I'm getting mixed signals from the administration about how serious they are about finding a solution to this. And so I really hope that we can count on them to join us at the table to roll up our sleeves and tackle this problem,” she said.

Vermont’s current predicament is in large part the result of decades of pension underfunding by a succession of legislatures and governors. It's only been since the mid-2000s that the state has made adequate payments into the pension system, which funds retirement for teachers and state workers. Other factors have compounded the problem: too-rosy assumptions about investment returns, the Great Recession and the state’s aging demographics.

Vermont’s unfunded pension liabilities have been a problem for years now, cannibalizing an ever-growing share of the General Fund. But the topic has taken on additional urgency this legislative session following a new valuation in 2020 of the system's unfunded liability that pushes the total up from $2.4 billion to $3 billion.

In recommendations to the Legislature, Pearce has proposed slashing the state’s additional $600 million obligation by taking what she describes as “painful” and in some cases “extreme” steps to address the long-term liability. 

The urgency to act on pension reform now is not only due to the long-term costs of the system’s unfunded liabilities, but next year’s projected price tag. 

The unfunded liability is the gap between the assets currently in the pension fund and what the state projects it will owe to employees once they retire. Because of the unfunded liability’s new valuation, the state has two options if it eventually wants to close that growing gap instead of letting the system go broke: start paying in even more — including as soon as next year — or reform the system to lower future debts.

This year, the state will contribute $219 million toward both pensions. Next year, if Vermont leaves the system as is, but decides to make the contribution its financial analysts say is required to keep it solvent in the long term, it’ll kick in $316 million. 

Scott supports doing just this. The governor's proposed budget for next year, which he unveiled Tuesday, fully funds pension contributions, including the extra $100 million. That gives the Legislature extra time if it chooses to take it, Greshin said, though “they (and we) have other preferred uses for the money."

The General Fund pays the lion’s share of the state’s annual pension contributions. In the 2019 fiscal year, 7.6% of the fund was dedicated to pension obligations. Next year, if the state adopts Scott’s proposal, 10.5% of the fund’s expenditures would go to the two systems.

Pearce’s reform plan would hold all current retirees harmless, but active employees could see their contributions increase and may have to wait longer to retire without penalty. Most notably, her proposal would eliminate all cost-of-living adjustments for active teachers upon retirement.

“This is a starting point,” she told the Senate Government Operations Committee on Thursday. “But we felt obliged to present these options to you.”

Pearce has cast her recommendations as a necessary attempt to save the system from insolvency — and as a way to protect the pensions from those who might seize upon the moment to push for a more draconian, fundamental change to so-called “defined contribution” plans.

The big difference between “defined contribution” and “defined benefit” retirement plans is who assumes risk. Defined contribution plans, like 401ks, only guarantee that an employer will contribute a certain amount each year toward an employee’s retirement, but does not promise a particular benefit upon retirement. 

With defined benefit plans — like pensions — it’s the other way around. Both active employees and the employer often pay in, but a retiree is assured a particular benefit, and it is the employer that is on the hook for making up the difference if a retirement fund performs badly.

No such overhaul has actually been proposed. But the Scott administration is talking to Pew Charitable Trusts, whose public sector retirement research project has received millions in funding from John Arnold, a billionaire philanthropist considered by many to be an anti-pension crusader.

Greshin said Pew had offered to study the state’s retirement system, an offer the governor welcomed. But Greshin said he wasn’t sure if Pew would submit any particular set of recommendations.

“I don't know,” he said. “But yes, those conversations have been recent.”

Aside from Pearce’s recommendations, the only concrete proposals on the table right now are those of the unions. Both the Vermont-National Education Association and Vermont State Employees’ Association have said the state should tap the wealthy before their members, many of whom are on the frontlines of the pandemic.

Steve Howard, executive director of the VSEA, said his union was pushing for a 3% income tax surcharge on Vermonters making $500,000 or more. The teachers’ union has not formally backed this plan, although its leaders have alluded to a proposal along those lines.

How much could such a levy on the richest Vermoners bring in? Quite a lot. A more up-to-date analysis by the Legislature’s number crunchers has not been recently produced, but Paul Cillo, president of the Public Assets Institute, a left-leaning Montpelier think tank, pegged it at about $80 million, based on 2018 tax data.

But the proposal would be a big lift, even in the Democrat-controlled Legislature, and is a “non-starter for the governor,” Greshin said.

Union leaders said they were heartened that the governor had been willing, in his budget, to find a way to fund the state’s pensions for another year without making drastic changes. But at his unsurprising refusal to consider a tax on the wealthy, they bristled.

“I think it's more reasonable to ask them to pay than to ask teachers and working state employees to take money out of their retirement. The average retirement for state employees is $20,000 a year, right?,” Howard said. “That's what some of these people pay their gardeners to weed their flower beds.”

This story was corrected Feb. 1 to more accurately describe Gov. Scott's proposal to fully fund the state's pension obligations in next year's budget.