“Anybody who retired in 2008 or 2009 can tell you if you have the misfortune of retiring when the market tanks, you’re out of luck on a defined contribution plan,” [VSEA Second VP Jeff] Briggs said.
Article published May 18, 2012
Pension crisis predicted for Vt.
By Peter Hirschfeld
Vermont Press Bureau
MONTPELIER — One of the state’s best-known financial minds says Vermont’s public pension system risks spiraling into insolvency unless policymakers enact sweeping reforms, and soon.
Union officials, however, say David Coates is using fear tactics to push for radical changes that could undermine the integrity of a pension system relied upon by thousands of Vermont retirees.
In a dour commentary sent Thursday to members of the Vermont Business Roundtable, Coates says unfunded liabilities in pensions and retiree health benefits for state employees and public school teachers have hit $3 billion.
Covering the cost of those benefits, he says, will eat up ever greater portions of Vermont’s general fund, siphoning resources from other important state programs.
“The question we need to be asking is, where does that revenue come from?” Coates, a former managing partner at the auditing firm KPMG, said in a telephone interview Thursday. “To the extent we need to fund it, that means we have to cut other programs.”
Coates, a longtime member of the Governor’s Council of Economic Advisors, first sounded the alarm over Vermont’s public pension system five years ago. Though lawmakers and the administration of former Gov. James Douglas enacted some cost-cutting reforms, Coates said more action is needed.
His recommendations include eliminating health care benefits for future retirees, requiring teachers and state employees to increase pension contributions, and eliminating cost-of-living increases in pensions.
By far his most incendiary proposal, though, is to move away from the “defined benefit” plans that now guarantee retired public-sector workers a minimum annual salary during their golden years.
“Probably as important as anything is to put employees in the state, both teachers and state employees, on something like a 401(k), which is essentially an annuity,” Coates said.
Such a move, he said, would decrease substantially taxpayers’ share of public workers’ pension plans.
But State Treasurer Beth Pearce said Thursday that Coates’ proposal has severe risks.
Exposing Vermonters’ retirement plans to a volatile market, Pearce said, could have ripple effects across the economy.
“The state is a large employer, as are schools. And those people in retirement are going to need reliable and adequate income to buy goods and services,” Pearce said. “Those services they buy … are an economic driver for the state and important for the long-term prosperity of Vermont.”
Jeff Briggs, second vice president of the Vermont State Employees Association, said the $3 billion figure used by Coates to frame his case isn’t as scary as it sounds. Public employees and taxpayers have 30 years to come up with the money, Briggs said.
“This whole unfunded liability thing is nothing but a scare tactic, because he’s not accounting for all the revenues that are going to come in,” Briggs said.
Briggs said public-sector retirees aren’t living high on the hog in Vermont; average annual benefits amount to less than $15,000. And Briggs said Vermonters learned an important lesson about the unreliability of a 401(k) during the recent recession.
“Anybody who retired in 2008 or 2009 can tell you if you have the misfortune of retiring when the market tanks, you’re out of luck on a defined contribution plan,” Briggs said.
Darren Allen, spokesman for the Vermont chapter of the National Education Association, said Coates has fought this battle before and lost.
“He was part of a commission a couple years ago trying to come up with ways the pension fund needed to be tweaked. And what ended up happening is his desire then to switch to an incredibly risky and dangerous defined contribution plan … was rejected by the commission,” Allen said.
Allen said teachers have made considerable concessions in recent years, including increasing contributions by $600 annually and increasing the number of work years required to earn full pension benefits.
It would be wrong, Allen said, to change the rules for public employees who have been paying into the system in some cases for decades.
“Certainly it’s not fair to the promises that have been made to public-sector employees,” Allen said.
Coates said his admonitions are designed to spur a debate among lawmakers, administration officials and public employees about a looming financial crisis.
“Now is the time to start taking some drastic action,” Coates said. “And that’s going to require not only workers and teachers to help that process, but the administration and really the Legislature.”