by David Coates, Managing Partner, KPMG (Retired) and member, Vermont Business Roundtable
More bad news has arrived for Vermonters, and especially Vermont taxpayers, with the release of the State Actuary’s 6/20/2017 Reports. The reports cover Pension and Retiree Health Care Benefits (OPEB) for State Workers and Teachers, and results are, frankly, quite startling.
The 2017 reports show that Vermont’s combined unfunded liability has increased by over $900 million (over 25%) in just one year. So as of June 30, 2017 our unfunded liabilities stand at $4.5 billion, an amount that is now three (3) times our General Fund revenues and seven (7) times our bonded indebtedness.
In other words, this is the biggest liability the state owes, is more than all of our other liabilities combined, and overwhelms the state’s balance sheet.
This large increase only compounds the problem we already had in paying for these generous benefit programs. Keep in mind that the state is not making any of the annual required payments on the OPEB. For 2017, the unpaid amount for OPEB was $85 million…yes, $85 million…a 57 percent increase over 2016. These payments do swing from year to year by several million dollars due to a combination of factors; for example, the unpaid amount in 2016 was $54 million. It is also important to note that these liabilities would have been over a billion dollars more were it not for changes already made by the Treasurer.
The state has made the annual required pension payments for several years how and, in 2017, that payment was $137 million. The annual required payment for 2019 is $177 million, an increase of $40 million or 29 percent in just two years. (These amounts are taken from the Actuary’s Report.)
We must ask the hard question: What programs will be cut or taxes raised, to cover this gigantic increase given that revenues are projected to only increase around 3.5%? Put another way, in 2008 the pension payment was 2.25% of revenues, in 2012 6.4%, in 2017 9.4% and in 2019 it will increase to 11.5%. And keep in mind, as mentioned earlier, the state is not paying anything against the 2017 OPEB obligation of $85 million.
To compound matters, another problem is likely to occur soon, which relates to the assumption used by the state for the return on the pension investments. In 2016, the assumption was 7.95% and in 2017 it was lowered to 7.50%. This assumption is still high compared to other states who are moving their rates to 7% and lower. For example, if our rate were lowered to 6.5%, a more reasonable assumption, it would have the effect of increasing our unfunded liability by $600 million. This would result in increased annual required pension payments in the millions of dollars … putting additional pressure on our revenues.
Failure by the state to make these pension payments would likely result in Vermont losing its coveted Triple A rating. That result would increase the state’s borrowing costs and those of other state-related agencies such as VHFA, VSAC, VMBB and VEDA who rely on the state’s rating when issuing their bonds…costing taxpayers additional millions of dollars.
Having said all this, there is some more promising news to report. The Administration and the Treasurer have reached an agreement to have a “stress test” performed on the pension and OPEB systems. My understanding is this will include testing how the systems will perform under different market and volatility conditions. Importantly, it will also address affordability, which is critical as to whether or not the systems are sustainable.
At the end of the day, does anyone think our state can possibly meet these obligations? I doubt even those legislators supported by the labor unions can believe this, given the preponderance and magnitude of this factual information. Without strong leadership to change our structural problems inherent in these pension and OPEB programs, our state is headed for a financial tsunami!
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