Well, we didn’t get our first public face-off between State Treasurer Beth Pearce and the public sector unions on Thursday. But we did get a better sense of Pearce’s argument for cutting benefits in the face of growing unfunded liabilities in the state’s pension funds.
The Senate Government Operations Committee had set aside an hour and 45 minutes to hear from Pearce and the teachers’ and state employees’ unions. But Pearce’s presentation lasted almost an hour and a half. At that point, GovOps chair Jeanette White declared that there was “no time today to hear from the unions.” They’ll be back in the virtual witness chair as soon as next week.
That should be interesting. The unions haven’t exactly welcomed pension cuts in their public reactions, but they’d be well advised to come to the committee with some ideas of their own. Because the state of the pension funds — especially the teachers’ fund — is not good.
(Pearce’s PowerPoint presentation to the committee, and her full report on the state of the pensions, can be found on the GovOps website.)
And the unions ought to be prepared for this. According to Pearce, she’s been meeting with them “at least weekly since mid-December” to discuss what to do. She also held virtual town meetings with roughly 1,000 members of the Vermont-National Education Association and around 350 members of the Vermont State Employees Association. She told the committee she wanted the unions to be involved throughout the process.
Until recently, Pearce had been adamant about not cutting benefits. She changed her tune after an outside actuarial review determined that the pension plans’ unfunded liabilities continue to grow, and have reached a critical level. “We need to do something now,” she told the panel. “You cannot say ‘We’re going to do a study and decide next year.'”
How big is the problem? The state employees’ fund is more than a billion dollars short; the teachers’ fund is almost two billion short. Both unfunded liabilities have steadily increased since the Great Recession of 2008-09, and took a big jump last year. That led Pearce to reluctantly call for cuts.
There are two main reasons for a decade-plus of shortfalls, Pearce said. The first is demographic changes; the workforces are getting older and retirees are living longer. (Teacher retirements hit an all-time record in 2020, due mostly to Covid-19.) The second is that the funds have failed to meet earnings projections.
Pearce recommends a reduction in cost-of-living adjustments for future VSEA retirees, and an elimination of COLA increases for retiring teachers. (Current retirees would see no changes in their pensions.) Members of both unions would see their required contribution increase — teachers more than state workers. She also suggests some other adjustments, but those are the two biggies.
Pearce continues to oppose a switch from defined benefit pensions to defined contribution (401K style). She asserted that the latter system would actually cost more. Sen. White is not quite convinced. “The voices for changing to defined contribution are swelling up,” she said. “We need to see studies that show it doesn’t save any money.”
Although Pearce has been consulting with the unions, she told the committee “there is no buy-in yet from NEA or VSEA. I’m committed to continuing the dialogue.”
The unions’ initial public reactions were not positive, but we have yet to hear their full viewpoints. In previous public statements, they expressed a desire to keep pensions whole, but also acknowledged the need for some kind of action.
Pearce indicated one path that would avoid cuts: Identifying a “dedicated revenue source” that restore the plans’ fiscal health without massive infusions of General Fund money. One possibility: The next federal Covid relief bill. “If that has money with no strings attached, we could use it to address the [pension] system,” Pearce said.
Of course, Congress has yet to take action on a third Covid bill. Plus, the last two bills included restrictions on how the money could be spent.
Not to mention that if Vermont does get another influx of federal cash, there will be many eager hands reaching into the pot. And I’m skeptical that Gov. Phil Scott would agree to the idea.
We’ve seen just the start of what’s sure to be a thorny process. Pressure will be on lawmakers to come up with a sustainable pension plan that’s the least offensive possible to all concerned. Especially the unions, which are a core constituency for the majority Democrats.
Really. No mention in Pearce’s report of Howard Dean cutting the necessary legislative payments into the system, followed by Douglas in lock step. Goodness, the legislators had no hand in the the downfall of the system either. It was all demographic and the lack of investment returns that will now make retirees do with less. I read that Dean said he would do it all again if he had the opportunity. I would vote against him again if I had the opportunity. What a mess of tripe. And, Senator White is the committee chair? John, get ready for more Shaw’s chocolate cake and hot coffee.
She has made reference to Howard Dean’s role and Jim Douglas’ as well, and I’ve written about it. And of course the Legislature went along. (Dean started the underfunding early in his administration, Douglas continued it until he and the Legislature agreed to fully fund the pensions.) That’s part of the problem; the new information is about what’s happened since 2007. That’s what brought about Pearce’s change of heart. If we were only dealing with the Dean/Douglas underfunding, we could pay it down over time. The more recent issues with demographics and rates of return are what pushed the issue over the edge.
If the report deals only with issues since 2007 then I understand. However, anyone who expected reasonable returns on investment after the banking collapse of 2007-2008 had to be dreaming. You did not have to be an economist to know that expecting decent returns for at least the next five years was a bit foolish.