At the end of last week, we got a sizeable Friday newsdump from an unusual source: State Treasurer Beth Pearce. In a report on the state’s public pension funds, she called for new limits on pensions for state employees and teachers. It was duly reported, first by VPR and then by VTDigger, but neither story captured the significance of Pearce’s pivot.
This is, in my view, the single biggest position shift by a top Democratic officeholder since Peter Shumlin abandoned single-payer health care in 2014. That move brought Shumlin’s political career to an ignoble conclusion, since he’d staked his governorship on delivering single-payer. I doubt that Pearce will have to slink off into the darkness, but she might not get the rapturous receptions at party functions that she’s gotten used to.
The pension plans don’t have enough funds to pay promised benefits because, through most of Howard Dean’s governorship and about half of Jim Douglas’, the state consistently shorted its annual contribution. Many have called for a shift from defined-benefit to a 401K-style defined-contribution plan. The former promises definite retirement benefits; the latter only promises to contribute money to the plan. Actual benefits depend on the health of the pension fund.
Pearce had been a champion of retaining defined-benefit. She’s an expert at public finance, so her view has carried a lot of weight. Now, she has abandoned that position. She still supports defined-benefit plans… but she has effectively changed her definition of the term. That’s a big, hairy deal. It puts legislative Democrats under pressure to go along with pension cuts — and that threatens to drive a wedge between the Vermont Democratic Party and two of its biggest supporters: the Vermont State Employees Association and the Vermont National Education Association.
I can’t say I blame her, given her recitation of the facts. But this could touch off a political shitstorm.
Until now, Pearce had insisted that Vermont could restore the pension funds by making reasonably-sized additional payments into the funds, over and above the actuarially recommended annual contributions. Now, she says, because of shortfalls in fund performance and changes in retiree demographics and lifespans, those additional payments would need to be budget-busters — $96 million per year.
Her solution: Retain defined-benefit, sort of.
She proposes shaving inflation adjustment for the state employees plan, and eliminating cost of living adjustments entirely for the teachers’ pension. She would also increase worker contributions and effectively raise the retirement age for full benefits.
These measures would only apply to future retirees, not current recipients.
To my eye, slashing inflation adjustments would significantly undercut the real promise of defined-benefit: Retirees don’t have to worry about making ends meet, because they are assured of protection against cost of living increases. Inflation has been fairly modest for quite a while now, but just ask anyone who lived through the 1970s what kind of havoc it can wreak.
Pearce doesn’t sugarcoat it:
The implementation of these proposals will significantly reduce benefits and increase employee contributions. From a risk sharing perspective, employees are taking on a substantially greater portion of the actuarial losses.
Yeah, that’s not good.
Her plan would resolve roughly 75% of the pension underfunding problem — by offloading the strain onto future retirees.
VT-NEA has already come out against the plan. Teachers, said union president Don Tinney, “have held up their end of the bargain,” and shouldn’t see their retirement security undercut because of politicians’ past mistakes. VSEA chief Steve Howard said his union is “determined to protect the defined benefit pension plan.”
VSEA and VT-NEA are the predominant labor voices in Vermont, and the backbone of the Democratic Party. With Pearce no longer defending public sector pensions as they are, Democratic lawmakers will face some very difficult choices.