MONTPELIER — Vermont’s three pension funds were battered by the Great Recession and are currently funded below levels recommended by actuaries, but the state has made some adjustments to improve their positions and state Treasurer Beth Pearce says she will seek long-term changes to the way they are financed to further ensure stability.
Vermont, like many other states, has struggled to fund the retirement benefits promised to teachers and state and municipal employees. The cost of health care benefits for retirees has grown faster than revenue growth, and the pension funds the state manages saw market losses during the Great Recession.
The three pension funds managed by the state — for teachers, state workers and municipal workers — provide retirement benefits, including health care, to tens of thousands of Vermonters. There are more than 8,000 active state employees, and nearly 10,000 active teachers and more than 6,600 active municipal employees.
There are currently more than 16,000 people, combined, drawing benefits from the three funds. In the 2014 fiscal year more than $258 million in benefits was paid to retirees, according to the state Treasurer’s Office.
As of 2014, the state had accrued a total pension liability — the value of promised benefits to retirees — of $5.278 billion and had total assets of $3.677 billion, a shortfall of $1.6 billion. That shortfall will be paid off over time, Pearce said, and changes to the pension funds’ financing will help close the gap.
“When you hear those large numbers, there’s a concern, and there should be a concern, but it also should be tempered with the understanding of the underlying financing and that there’s a long-term process of paying down these liabilities and that the state is committed to making the annually required actuarial contribution,” she said. “I’m confident that our Legislature is informed and is taking the right steps.”
The U.S. Government Accountability Office recommends that public pension funds contain at least 80 percent of the money needed to pay the benefits promised to retirees, known as liabilities. The national average for public pension funds is just 71.8 percent as of the 2014 fiscal year, according to The PEW Charitable Trusts.
Just one of Vermont’s three funds currently meet the GAO standard. The municipal employees fund, as of 2014, has enough funds to cover 86.2 percent of liabilities. The state employees fund can cover 77.9 percent of liabilities and the teachers fund can cover just 59.9 percent of liabilities.
“The great recession had a major impact on all three plans,” Pearce said. “The teacher plan was the plan that had more stress on it. In 2008, they went into the Great Recession in the low 80s and it worked its way down,” she said.
The teachers retirement fund was already in a more precarious positions prior to the recession because of long periods of underfunding in the past, according to Pearce.
“That has contributed to it not being in as strong a position,” she said.
From 1991 to 2000, the state did not come close to providing the teacher fund with the amount necessary to help it maintain a strong funded position in the long-term based on actuarial projections. During those years, the annual contributions ranged from a low of 38.1 percent of recommended contributions to a high of 79.8 percent.
“Clearly there’s been some underfunding. The source of that I’m not going to get into, that’s not, I think, productive,” Pearce said. “In 2005 we sat down with the representatives in the Legislature … and if you notice, since then, they’ve been funding the ARC.”
Vermont has a closed amortization plan for its pensions, similar to a mortgage, that sets 2038 as the date by which the plans should be fully funded. Some states use an open amortization period, which is akin to refinancing a new mortgage every year.
To meet its closed amortization goal, the state must make annual contributions to the funds known as an annual required contribution, or ARC. The ARC is based on several actuarial factors, including the number of people expected to retire, the mortality rate of retirees and market factors. In Vermont, the ARC payments, based on those actuarial determinations, are scheduled to increase by 5 percent each year.
Pearce said the state for the last two years has been fully funding the ARC payments for all three funds. But under the current financing plan, the state will not see an improvement in the percentage of unfunded liabilities until 2022.
She said her office recently had an actuary recalculate the factors that determine the state’s ARC payments, which “put upward pressures on our funded position.” Having accurate actuarial determinations will help the state better understand its funded position, Pearce said.
“If you don’t take care of those things on a regular basis it gets away from you. We moved up our experience study by a year,” she said. “What we’re trying to do is keep current with our actuarial trends.”
The state, following the review by actuaries, has lowered the assumption on the rate of return from the pension funds’ investments. Mortality assumptions were also increased, adjusting for retirees who are living longer than in the past.
Changes have also been made on the contribution side. In 2010 and 2011, employee contributions were increased. Primary to 2010, teachers were paying 3.45 percent of their salaries into the pension fund. Now, vested teachers, those who have at least five years of experience, are paying 5 percent while non-vested teachers pay 6 percent of their salary.
Likewise, most state employees have seen their contributions increase from 5.1 percent to 6.4 percent.
The retirement age for teachers was also raised in 2010 from 62 to 65. Teachers can retire at an earlier age if they meet the so-called rule of 90, which calls for a combination of age and years of service that equals 90.
All of those changes have helped ease some of the pressure on taxpayers.
“The bottom line for us is teachers are paying a little bit more, state employees are paying a little more. The combination of those was about $20 million in decreased cost to the taxpayer,” Pearce said.
The changes have helped stabilize the funds, but Pearce said she plans to propose changes to the way the state pays into the funds. Rather than paying more in the out years — because of the 5 percent annual increase in payments — Pearce said she would like lawmakers to pay more up front.
“The big issue for me this year will be how we structure that mortgage,” Pearce said. “If we change the way we finance that we can do two things. One is we will pay down the unfunded liability faster and we will be in a position where that funded status will improve faster.”
The proposed changes will not look to slash benefits, Pearce said, or be an attempt to avoid the state’s obligation to retirees.
“We’re not looking to lower our payments to try to get out of a budget impact, for instance,” she said. “We’re looking at how we can structure this so we lower the overall impact to the taxpayer. In the long run they’re going to be paying less because we’re going to lower that interest. To me, that’s good stewardship of taxpayer dollars.”
Legislative leaders, despite the fiscal pressures they face, are open to the dialogue. The Legislature managed to close a $113 million budget gap in the 2016 fiscal year while fully funding the ARC payments during the last legislative session. In January, they face a projected $66 million gap.
Paying more into the pension funds up front would put additional pressure on the state budget. Still, Dylan Giambatista, chief of staff for Democratic House Speaker Shap Smith, said they plan to consider Pearce’s proposals.
“We are open to finding ways to strengthen the funding position of the funds and also to understand if there are opportunities to save money as we look to fully fund our obligation to retirees,” he said.
Giambatista noted that the Legislature has fully funded ARC payments during his tenure leading the House and are encouraged by discussions “to see how we could potentially put those funds in the best possible position.”
Similarly, Senate President Pro Tem John Cambell’s office said he, too, is willing to consider the treasurer’s proposals.
Despite the challenges, Vermont, according to Pearce, remains in the middle of the pack in terms of its unfunded liabilities when compared to other states. And, the state is in a better position than many other states because it has not tinkered with benefits based economic forecasts.
“You’re going to have ups and downs in the market. That’s why it’s important when you have good times that two things don’t happen. One is that you say, ‘Well, we’re doing really well so we should stop paying the ARC because the investment income will make up for it,’” Pearce said. “The second, which some states have done, and I don’t see a pattern of that in Vermont, which is, ‘Well, the market is doing really well so let’s take that money and translate that into benefit enhancements for employees.’”
Pearce said “other states have had more of a history of providing benefits in boom times that they can’t support in bust times.”