Coates Op-Ed: State Pension Woes Become Municipal Woes [2.3.14]

By David Coates, Roundtable Member and Former Managing Partner, KPMG (Retired)

I wish there was better news to report to Vermonters on the pension front this year, but unfortunately there is not. In fact, the pension problem is now spreading to our cities and towns.

First, an update on the state picture.

Total pension and retiree health care unfunded liabilities for the state workers and the teachers remained essentially the same as in 2012….over $3 billion.  There was a $41 million overall decrease after State Treasurer Pearce was able to achieve over $200 million in positive changes to the teacher retiree health care benefits.  If it were not for this one time effort, the result would have been an increase of over $160 million. This is the only good news.

And the prospects going forward are anything but encouraging.  The state continues to take the annual teachers retiree health care costs from the teachers’ pension fund assets.  This practice of robbing Peter to pay Paul reduces their pension fund assets by $20 million each year. This is very bad news.

And that’s not all. Other contributors to the negative outlook include…

The required pension benefits determined by the actuary through 2016 increase by about 8% per year.  The state General Fund revenue forecast indicates revenues are expected to grow just about 4% per year.  How will this gap be paid?

The annual retiree health care benefits determined by the actuary are approximately $113 million.  Since the state’s policy is to fund only the current cost of these benefits, a shortfall of over $80 million per year will be incurred.  Over 25 years this $80 million of underfunding will triple and cost the state around $240 million.  As our State Treasurer Pearce has said, “it’s taking the wind out of the sails of the pension’s recovery.”

Structural change in our pensions and retiree health care benefits is needed now.  Since 2008 our combined unfunded liabilities have increased from $2.1 billion to $3.1 billion today.  An increase of $1 billion in only five years! This dilemma must no longer be ignored.

Not only is the state in a crisis mode, but so are many of our cities and towns.  The Vermont Municipal Employee Retirement System (VMERS) handles the pensions for nearly 500 Vermont towns and school districts.  Around 80% of these are defined benefit plans just like the state workers and teachers’ plans.  In 2008 all of these plans were overfunded to the tune of $5 million and today they are underfunded by $82 million; a negative change of $87 million in just five short years.  The primary source to fund these obligations will be increased property taxes to the residents of the towns. Is your town prepared to incur these new costs?

VMERS does not include Burlington ($58 million) or Rutland ($23 million as of 2012). South Burlington does not have an unfunded pension liability, but instead has a note ($7.9 million) that it incurred to eliminate the liability.

The bad news keeps getting worse for current taxpayers and, of course, the longer we postpone fixing the problem the worse it gets for our children and grandchildren. I used to think the phrase “promises made, promises kept” was important, but now it seems like wishful thinking as we continue to let these obligations pile up unchecked. When will Vermonters act?

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