Task Force: Pension Benefits, Design, and Funding

At the 8/17/2021 task force meeting, Chris Rupe (part of the Joint Fiscal Office) submitted a document entitled: impact of various possible changes to plan design. The task force reported that there are various scenarios that are being considered, to include:

  • Adjusting employee contributions to the pension plans
  • COLA (cost of living) adjustments for active employees, for all except those within 5-10 years of retirement
  • New one-time or ongoing revenue sources. None yet been selected, but under consideration are:
    • Cannabis tax revenue
    • Sports gambling
    • High-income tax surcharges
    • Elimination of capital gains income tax exclusion

Interesting to note that there is an agreement that any changes to COLA will be phased by 0.5% each year until agreed upon max is reached. The intent is to not to make these changes a dramatic ‘hit’ to pension. It is important to also note that it is strongly recommended by Joint Fiscal Office (JFO) that any combination of options must be modeled by actuaries as a group - all together – not individually.

Variations on the average final compensation were discussed, as was the vesting period, and the level of employee contribution. There are a number of different benefit groups with various impacts: state and teachers’ pensions and groups within the state pension plans to include group c, group d, old group f, new group 4, group c1 and group c2.

An interim report was reviewed by the Task Force mid-October. The report provided a detailed timeline of hearings and testimony beginning on July 2nd with links to key documents.

The following statement of the issue as follows:

“The VSERS and VSTRS are vital components of recruiting and retaining an excellent public sector workforce, but neither system has enough assets today to cover the projected cost of retirement benefits they must pay out in the future and the size of the shortfall has grown significantly in recent years. The annual cost for Vermont taxpayers to fund the systems is projected to grow throughout the remainder of the amortization period ending in 2038. Absent any changes, the liabilities will most likely exceed the state’s financial capacity to both support the system in its current form and continue to provide critical public services”

Part of the report provides an explanation of the causes of the unsustainable growth in liabilities to include:

  • Legacy underfunding
  • The great recession
  • Actuarial rate of return
  • Retired teacher health benefits paid from pension plan
  • Demographics and experience factors
  • Change to assumptions

The task force has either received or requested actuarial analysis on the following issues:

  • Cross-subsidization of pension costs between VSERS employee groups
  • Projected impacts of both one-time and recurring revenue on the actuarially-defined employer contribution (ADEC) and funded ratios for each of the two pension systems
  • Projected impacts of various changes to contribution rates, contribution rate structures, the COLA formula, and incentive to encourage employees to work longer.
  • Possible funding schedules to prefund OPED benefits.

The report also outlined the ‘principles’ that any changes to the retirement systems must balance multiple interests:

  • Recruitment, retention, and public benefits.
  • Commitment
  • Sustainability
  • Affordability
  • Net economic and demographic impacts
  • Equity

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