Dear Members of the House Government Operations Committee,
I have been working since 1964 - a lot of years, I know. Much of that time I was involved with Human Resources and one of the persons responsible for overseeing pension plans. I was Vermont’s Commissioner of Personnel and Human Resources twice during my career and served on the House Government Operations Committee – the same seats you now sit in.
About 15 years ago, David Coates (retired managing partner of KPMG) started alerting the state about the pending pension liability crisis. I remember sitting in your seat when David presented a case. I remember him talking about switching from a defined benefit plan to a defined contribution plan as part of the solution. Governor Douglas encouraged the state to make changes through the bargaining process to address the growing situation, but no one listened. And here we are! Over a decade later and the problem is bigger than any of us could have imagined back then.
The Pension Benefits, Design and Funding Task Force, created by the legislature last year, recently released its final report. The recommendations are projected to reduce the retirement systems’ unfunded liabilities by a little more than $2B. It was a good first step but did not go far enough in addressing Vermont’s 4.3B pension deficit liability.
In response to the report, David Coates and Mark Crow (Tenth Crow Creative, inc.) released a commentary on the impact of the recommendations made by the Task Force. Campaign for Vermont (where I serve as President of the board) agrees with the conclusions and recommendations made by David and Mark.
“None of the recommendations included the structural changes needed to make the retirement systems sustainable. Instead, the changes are incremental and only offer temporary relief, meaning we all will be dealing with this problem again in the not-too-distant future.”
We should build on this momentum we have already gained on this issue and fix the situation for the long-term. David and Mark presented three recommendations which are as follows:
- Actuarial assumptions should be reviewed at least every three years if not sooner, especially when adverse economic conditions occur. Also, the actuarial assumptions include using a 7% rate of return and discount rate through 2038. It’s just not realistic that we will maintain that high of return over that time period. We should be realistic about what the actual liabilities are so that we better understand the magnitude of the problem and how critical it is that we address it now in a more sustainable fashion.
- We must create different plans for new state employees and teachers that we hire. This step alone is critical to reaching a sustainable solution. Otherwise, the unfunded liabilities will just keep growing. This should entail implementing some form of defined contribution plans or risk-sharing. They could be the sole plans available to new hires or a component of defined contribution/benefit hybrid plans.
At a minimum, defined benefit plans for new hires should be restructured to reduce costs while still remaining competitive.
- There is no provision in the task force’s recommendation to address unanticipated, significant downturns in the economy. The impact of these occurring should not be filled entirely by the state (taxpayers). Unexpected cost increases or return losses between the state and the retirement systems should be equitably shared.
The state is at the 50-yard line. We need to bring it on home! Now is the time to fix this issue and ensure sustainable retirement systems going forward. Campaign for Vermont encourages the legislature to follow the recommendations set forth by David and Mark, especially for new hires. As pointed out in CFV’s recent data-driven study, the state offers above average salaries and, even paired with a more modest pension plan, would provide new employees with a competitive employment package.
Be braver than we were. Let’s get to the goal line.
President, Campaign for Vermont