S.286 Summary - State Pension Systems

S.286 is meant to address deficits in both the State Employees' Retirement System (VSERS) and the Vermont Teachers Retirement System (VTRS) by adjusting contribution rates, prefunding, and other changes.

In furthering our vision of an informed and active electorate, we are providing summaries of key bills considered during the 2022 legislative session. S.286 is one of these.

S.286 Bill Summary

The bill includes changes in the following areas:

For the VSERS (state employees):
- Beginning in FY 2023, increasing the contribution rates of active employees.
- Modifying the cost-of-living-adjustment (COLA) formula for retired employees so it is more in-line with CPI.
- Adding a Group G plan that includes facility and other employees of the Department of Corrections who provide direct security and treatment services to offenders.
- Increasing the normal retirement age and adding a longevity incentive for Group C members.
- Increasing the normal retirement age and the retirement allowance formula for certain Group D members.
- In FY 2022, making a one-time payment of $75M from the General Fund towards the unfunded liability, using half of the $150M reserved in the FY2021 Budget.
- Beginning in FY2024, annually funding an additional payment to the actuarially determined employer contribution (ADEC) that grows to $15 million in FY 2026 and remains at that level until the fund reaches 90 percent funded.
- Amending the General Fund year-end surplus construct to reallocate 25 percent to the unfunded liability.
- Creating a schedule to prefund other postemployment Benefits
For the VTRS (teachers):
- In FY2023 and FY2024, increasing the contribution rates for all active members according to a rate calculated by income bracket
  - in FY2025, a marginal rate schedule would be implemented.
  - Requires the Secretary of Digital Services and the State Treasurer to report back on the implementation of the marginal contribution rate schedule for active members beginning in FY2025.
- Modifying the COLA formula, including the creation of a postretirement adjustment account.
  - The Account may be used for COLA increases as approved by the General Assembly upon recommendation by the Board.
  - This account may receive 25% of any General Fund end-of-year surplus.
  - After the system is 80% funded, the account will be considered to have sufficient assets to pay for the increases and other funding sources will be dissolved.
- A one-time payment of $75M in FY2022 General Funds towards the unfunded liability, using half of the $150M reserved in the FY2021 Budget, plus an additional $50M (total of $125M).
- Beginning in FY2024, annually funding an additional payment to the ADEC that grows to $15M in FY2026 and remains at that level until 90% funding is achieved.
- In FY2023, underserving $13.3M of Education Fund to begin prefunding other postemployment benefits (essentially reallocating these payments).
- Creating a prefunding schedule that charges the OPEB normal cost to the Education Fund.

Updates From the Last 6 Weeks of the Legislative Session

April 4th Update

The bill re-balancing Vermont's public employee pension system, S.286, passed the Senate Floor on Friday in a unanimous vote. We have not yet had a chance to finish reviewing the final language, but previous versions of the bill only address roughly half of Vermont's pension liability.

We published an Op-Ed from David Coates and Mark Crow this week related to the pension deficit and recommended solutions addressing it - The Art of the Possible... Not Really

Read our letter to the House Government Operations Committee on April 7th

April 10th Update

On March 30th Senator Brock introduced an amendment on the Senate Floor that would allow for new hires to make a choice between defined contribution and defined benefit plans. The Vermont State Employees Association has been opposed to offering a defined contribution plan for years. They worry seems to be that employees and teachers won’t have the ability to manage their own funds – we disagree. There is a defined contribution system in place for exempt employees that is working quite well, so the state wouldn't even need to stand up a new program, just give access to non-exempt employees.

The Chairwoman of the Senate Government Operations Committee said that the Pension Benefits Task Force discussed offering a defined contribution plan but decided it best to focus on what was in place for state employees and teachers already. She said that the newly formed Joint Pension Oversight Committee could pursue defined contribution plans if they so choose. The Senate voted not to accept the amendment offered by Senator Brock.

On April 1st, Senator Kitchel presented an amendment that was focused on amending the Cost of Living Adjustment (COLA) language in the bill. It provided for incremental increases in COLA – as the plan becomes healthier. They are hopeful that by 2038 COLAs will move from 50% of GDP to be more on-par. A roll call was taken and the amendment adopted 28 - 0.

We would suggest that the House Government Operations Committee include a requirement for the Joint Pension Oversight Committee to study whether a defined contribution plan is feasible and should be offered as a choice to new hires. See the letter we sent to this effect.

Last week, the Joint Fiscal Office discussed S.286 and presented an overview of final recommendations to the House Government Operations Committee. Based on preliminary actuarial estimates the bill is expected to reduce Vermont’s long-term unfunded retirement liabilities for state employees and teachers by approximately $2 billion by prefunding other post employment benefits, modifying the pension benefit structure, and making additional state and employer contributions into the retirement systems.

State Treasurer Beth Pearce testified to House Government Operations Committee in support of S.286. She views this bill as a "very good step forward and we appreciate the work of the Pension Task Force." However, she sees a need for some more work and will be working with retirement boards in the coming weeks, particularly on the Cost of Living Adjustment (COLA) issues.

Pearce discussed the VSEA proposal around creating a Group G for corrections personnel. The proposal will not negatively impact current retirees or active employees who are within ten years of current normal retirement eligibility.

On Thursday, the Joint Fiscal Office provided a summary chart of the preliminary estimates of fiscal impacts of S.286 on the pension funds.

The bill contains a $200M one-time General Fund appropriation in FY2022 to the pension systems to pay down unfunded liabilities – $75M to the Vermont State Employees’ Retirement System (VSERS) and $125M to the Vermont State Teachers’ Retirement System (VSTRS). The bill also contains a $13.3M one-time Education Fund appropriation in FY2022 to the Retired Teachers’ Health and Medical Benefits Fund to begin prefunding health care benefits for retired teachers.

April 17th Update

There has been a great deal of conversation about how to begin implementing S.286 and employee (primarily teachers) contributions. Michelle Baker from the Vermont Association of School Business Officials testified before the House Government Operations Committee last week that her organization, on behalf of administrators, is concerned about the amount of work now required of school business managers. They were not contacted while the task force was working on its plan. Many requirements have to be manually entered for each teacher and some deductions cannot be automated. The resources capacity to do the work is not there and is very challenging. She does not believe the benefit and contribution transitions are feasible by the July 1 implementation date in the bill.

Auditors pointed to at least six payroll systems that are in play. Some districts have up to 72 different types of payroll deductions. Changing each payroll system over to support the new requirements would cost around $7,500 for each school district.

Chairwoman Copeland-Hanzas was frustrated that they are just publically bringing this up now, with only three weeks left in the session. She asked the school business managers to "tell us what you need for support to get it done." The Agency of Education has been involved, as have superintendents but no one has found a solution since they started working on this in February.

David Coates and John Pelletier testified on S.286 this week also, saying that the bill does not include systemic solutions and will not permanently fix problem. A defined contribution (DC) plan option would allow new hires to join a plan that will limit the state’s liability. They believe assumptions around rates of return in the existing defined-benefit plans are unrealistic and that the state should be more realistic in their assumptions. The actuarial assumptions for the Vermont's pension system use a 7% rate of return and discount rate through 2038. No one is using this high a rate of return. By assuming a high rate of return it allows the annual required contributions to be lower which means less financial impact in the current fiscal year but it puts the long-term viability of the plans in jeopardy.

Employee turnover is increasing, both within state government and globally. DC plans are portable, they reduce volatility, are not subject to the same restrictions, and increase return rates in most circumstances.

Coates and Pelletier referred to an Op-Ed from last week, which Campaign for Vermont published.

There are also issues with inflation assumptions. The projections currently being used is and annual inflation rate of 2.3%. We already know that assumption makes no sense. The CPI for this year was 4.6% which current retirees see their pension benefits adjusted for. This means that the actual increase in payouts was nearly twice what projections estimated for this year. This assumption being wrong in just one single year resulted in an increase to the unfunded pension liability of $58M. Just one year!

Underestimating Cost of Living Adjustments (COLA) for retirees will result in new losses to the pension plans and will increase the unfunded pension liability.

According to Coates and Pelletier, to reach a meaningful, long-term solution, and to reduce the volatility of the annual state/employer contribution, the following should be part of the legislation:

More frequent reviews and adjustments of assumptions and rigorous stress testing.
The state should create alternative plans for new hires.
There needs to be a risk-sharing policy to avoid the state (and taxpayers) taking on all the market risk.

They concluded saying that given the scale of the challenge, providing benefits structured more in line with other Vermonters for new employees does not seem unreasonable, nor does asking the state workers’ and teachers’ unions to share a more equitable portion of the burden in solving this critical issue that continues to threaten the financial well-being of our state.

Campaign for Vermont agrees with the recommendations above. We also found in a report from last fall that public employee wages are competitive with the private sector which means exorbitant benefit plans may not be necessary to attract and retain workers.

The preliminary actuarial analysis commissioned for the Pension Task Force expects the current bill will reduce the state’s actuarially determined employer contribution (ADEC) by approximately $8.7M annually and the Vermont State Employees Retirement System (VSERS) unfunded liability by approximately $58M (notice this was totally offset by this year's miss on COLA increases).

Proposed modifications to the Vermont State Teachers Retirement System (VSTRS) would reduce the state’s ADEC by approximately $4.8M annually and the unfunded liability by approximately $34.9M.

The House Government Operations Committee voted the bill out on Wednesday and it was referred to the House Ways and Means Committee who we expect will take up the bill this coming week. However, Gov Ops has already scheduled testimony on defined contribution plans for this coming week so we may see a floor amendment offered. Some members of the Committee were disappointed that it was not being included in the bill now. There was lots of concern that this bill doesn't actually solve the problem, however the vote was unanimous regardless.

April 24th Update

The House Ways and Means Committee took up S.286 on Tuesday. David Coates and John Pelletier followed up on testimony they provided last week, saying that to reach a meaningful, long-term solution and to reduce the volatility of the annual state/employer contributions, the following should be part of the legislation:

More frequent review and adjustment of assumptions and rigorous stress testing.
Alternative plans for new hires.
Move towards risk-sharing between the state and employees (state currently carries all the risk).

Given the scale of the challenge, providing benefits structured more in line with other Vermonters does not seem unreasonable, nor does asking the state workers and teachers to share a more equitable portion of the burden in solving this critical issue that continues to threaten the financial well-being of our state and the retirement benefits promised to public sector employees.

The pre-funding of pensions only reduces the unfunded liability by $300M, just 10% of the current liability. The other $1.7B reduction in liability results from an accounting change. Prefunding the retiree health care benefits permits the use of higher assumed rate return (7%) compared to the current (2.2%).

These extraordinary benefits, not generally found in the private sector, remain unchanged. Surprisingly the bill created a brand new, and potentially very expensive, Cost of Living Adjustment (COLA) benefit for the teachers. The full cost of the COLA benefit changes could be as high as $300M.

The Committee passed the bill out without amendment.

The House Appropriations Committee reviewed the bill next, looking at changes that the Government Operations Committee made last week. They made several technical changes to the bill – none of which changed the recommendations of the Task Force but did add an amendment regarding the establishment of Group G for corrections workers. There is also language being worked on regarding the new contribution plan for teachers because business managers were concerned about their ability to respond to the new requirements around marginal withholding structures. This will likely be offered as a floor amendment.

Chairwoman Hooper was concerned that they would have to appropriate funding and still don’t know how much. Representative Gannon (from Government Operations) said the fiscal impact would be negligible – perhaps less than $20K impact on the teachers pension fund.

The proposal would be an interim measure, with an alternative contribution rate structure for FY2023. This system would charge flat rate on every dollar earned by an active member based on which bracket their contract salary falls within. There are eight proposed brackets with effective rates ranging from 6.00% to 6.65% (see table 8). Estimates by the Joint Fiscal Office based on active payroll data suggest that this alternative rate structure will yield virtually the same amount of revenue in FY2023 as the originally recommended structure.

The Committee came back on Thursday and, after some discussion about reporting requirements, they voted 11-0-0 in favor.

Pensions - Group G

The House Government Operations Committee reviewed language on Wednesday related to a new Group G in the Vermont State Employees' Retirement System. Group G was designed for actuarial neutrality and is meant to provide a more stable benefit employees from corrections who, because of the nature of their jobs, can retire at age 55 (similar to state troopers). Group F (the standard group) members can elect to switch to Group G by June 30, 2023.

By September 15, 2022 the Department of Human Resources shall issue a list of eligible positions which primarily include facilities employees in the Department of Corrections and the Judiciary, security officers, and other qualifying employees. Contribution rates are based on hourly pay rates similar to Group F, however contribution rates are higher because of the lower retirement age. This plan was developed by the State Treasurer's office and the Vermont State Employees Association. Calculations were verified by the Joint Fiscal Office and presented to the Committee.

May 1st Update

Representative Gannon reviewed an amendment he was proposing to S.286 in House Appropriations Committee on Tuesday, which:

Expands definition of total earnable compensation to include stipends and part time compensation. Also provides a process to recalculate working from full time to part time and visa versa.
Makes some additional changes to make sure that digital services is prepared for the payroll changes in FY2025.
Makes changes to dates throughout the bill to ensure consistency.

Gannon also shared a separate amendment later on the House Floor debate over the bill. The amendment was on behalf of the House Government Operations Committee which contained four technical changes:

A few minor Group G changes along with a change to judges retirement date.
Date for election of Group G was changed as recommended by the Department of Human Resources.
Will hold teacher's contribution rates flat for FY2023 and FY2024 before switching to a marginal rate in FY2025.
Asks the state’s Digital Services to work with superintendents to provide whatever support they need to begin using marginal contribution rates.

A new fiscal note was prepared by the Joint Fiscal Office which indicated minimal financial impact.

A role call was requested and sustained 144-0, 3rd reading was ordered. One member voiced concern that a 7% assumed rate of return on investment was too optimistic and that the legislature would be back dealing with the same issues in a few years. Several other members also noted they were not happy that the bill did not go further.

The bill was delivered to the Governor on Friday after final approval from the Senate. He has five days to sign or veto it.

May 8th Update

Governors veto of S.286 was presented to the Senate on Thursday morning. Senator White shared that the only recommendation that the Governor offered was that new hires should be on a DC plan. She expressed frustration that, during the entire eight months of the Task Force, the Governor did not present this recommendation to them. This bill is quite intertwined with the budget and that not overriding the veto would force them to go back to the drawing board.

Senator Brock warned that within eight years the legislature will be back dealing with the same issues again because this bill does not go far enough. He voted yes on the override because it moves the needle, but he wanted to communicate that the legislature's work is not done.

The Senate overrode the Governor's veto 30-0-0.

The House took up the veto override on Friday. There was little discussion outside of the Governor's failure to bring his proposal forward earlier. The House voted 148-0 to override the Governor's veto of S.286. The bill will now become law.