David Coates: State retirement plans need a robust stress test

By David Coates

Vermont’s $4.6 billion liability for the state workers and teachers pensions and retiree health care benefits (OPEB) increased by $171 million for this past year ended June 30, 2019, and over 110 percent since 2008. This increase was despite continued assurances by policymakers that they had a plan to pay off these obligations over the next 20 years.

Certainly, there is no evidence to date to corroborate the state’s claim, without some combination of increasing taxes, reducing benefits or cutting existing programs, which the state has been reluctant to do. At this point in time, policymakers need an independent analysis of these benefit plans.

I have been writing about the dangers of these unfunded liabilities and talking to various groups as well for over ten years. Unfortunately, the people who are in elected positions and could or should have taken action, haven’t. The unions, for their own vested interests, have successfully downplayed the urgent state of affairs during this time. But, the legislature in particular has a fiduciary duty to address these issues in a process that is free of conflict.


David Coates is a retired managing partner for KPMG.

The state now pays over $200 million per year (and increasing each year) to fund just the pension plans ($2.3 billion in unfunded liability) and, meanwhile, chooses to not fund the annual required payments of around $80 million for the retiree health care benefit plans ($2.3 billion in unfunded liability).

Our top pension priority should be protecting the benefits promised to current beneficiaries, and state employees and teachers. Keeping the existing program plans in place for new hires is necessarily a secondary goal, assuming the funding is available to do so … but the funding certainly isn’t available now. The state needs an independent analysis of these plans that will test not only the state’s ability to pay for our liabilities under different market and economic situations, but will ensure that the participants will get the promised benefits. And this test needs to be conducted on a regular basis.

Several states now require these rigorous stress tests using a nonpartisan, data-driven approach that provides transparency and assesses current and future funding requirements. Such a comprehensive test in Vermont will provide lawmakers with an independent assessment of potential costs and liabilities.

This past year, the state engaged Segal Consulting, the state’s actuary, to perform a risk assessment of just the pensions plans, which you might argue presents a conflict of interest; this is not to be confused with a more complete stress test analysis. The stated primary purpose was to evaluate the reasonableness of current rate of return assumptions for the funds now invested. The current assumption is 7.50 percent, but the actual rate for the last fiscal year was 6.1 percent, and the rate of return over the last twenty years has been less than 6 percent. This means that each year the state has to make up the difference in additional contributions to the pension plans to make up the difference between the assumed and actual rates of return.

As a side note, in 2008 the actuary projected the 2019 pension liability would be $527 million. The actual liability as reported by the actuary, as of fiscal year ending June 30, 2019, is $2.3 billion. How could they miss by over 400%? I think Vermonters need some answers.

Across the country, most other states are using lower assumed rates of return. This is just one of the reasons why an independent stress test is critical for all of these plans, the health care and retirement plans for both state employees and teachers. But there are other, equally important reasons why a complete stress test is warranted and is sound public policy.

All Vermonters should be concerned, especially our legislators and the three retirement boards, whose policy making legacies will be the health of these funds for both plan participants and taxpayers. Currently, they’re not healthy at all.

David Coates is a retired managing partner for KPMG and current member of the Vermont Business Roundtable. Reprinted with permission from the Ethan Allen Institute Blog.

Images courtesy of U.S. Department of Health and Human Services and TNR

3 thoughts on “David Coates: State retirement plans need a robust stress test

  1. One more reason to “Get Out Now”….even tho’ the panic fiscalcrisis in VT may be 5 years or less away….you can’t sell your house, if it is higher end, in the majority of VT. Chittenden County is better…but I see a lot of houses for sale in the million range in Charlotte, Shelburne and other higher end towns. None are selling. Everywhere else in VT they are dead. My old neighbor just outside of Montpelier…for THREE YEARS they tried to sell their house WITh 75 acres….into it about $1.4 to $1.5 million and close to that appraised for taxes. Hug property taxes… when the new Tax bill came and no longer allowed deduction for your high property taxes and high income taxes….your property just became a LOT more expensive to “carry”.. so it is worth LESS! Tax bill is a killer for all high end homes and upper income tax payers. My friends finally gave up ,they wanted out so badly and sold their VT “property investment” for $785,000. They lost about $600,000 because they wanted out so badly (wise choice). BUT NOW! the NEW owner can go to the Town appaiser and prove that the tax appaisal was hundreds of thousands too high, from a very proveable THREE YEAR WAIT….”fair market value” is now far less!. The UPSHOT of all this is that the LOWER appaisal will now bring in MUCH less in property taxes to VT and to the town itself! These high end homeowners are the ones that pay FULL TAXES, no subsidy. So if across the board their houses are worth LESS than appriasal now, and they fight that, VT will get LESS in tax revenue! But 70% of Vermonters still get subsidized propery taxes! So, if you want out, start now! Because higher end houses are completely “illiquid” now and BE prepared to sell for LESS…maybe MUCH LESS… than what you are appraised for! I also went thru this for my home, and grabbed instantly the first bid , even though below what I wished. It is that bad out there….and it will only get worse as time goes on. PLAN AHEAD!

  2. It’s too late, Mr. Coates. You’ve tried non stop for over a decade now. It is time to give up. Unions/Democrats/Progressives and Socialists & Unions are tied at the hip. Liberals cannot control VT without Union political donations MONEY and the near 100% of Union members vote “En Block” democrat – to keep Liberals in power….who will keep their gold plated benefits in place. So Liberals will NEVER do what needs to be done to address the pension and healthcare issues It;s time to get out of VT. I did. You have less than five years until fiscal “reality” hits hard and there is no money…and VT will be unable to borrow any money. Credit rating will be near junk level….Just as Illinois debt is ONE notch above a junk rating. The only legislator solutions will be taxing the supposed rich….that is just taxing more income! WAIT until then propose a WEALTH TAX on top of that! It has already been bandied about to pay for ShumlinCare…..so a new bumper sticker is needed. If the Bernie’s can slather most VT cars with bumper stickers, we can too….here it is: “VT GON”…..VT Get Out Now. Did you see last week’s legislative priority? they want to make condoms freely available to all middle and high schoolers. Amazing, the abject ignorance. Kumbaya. Six months and a day is all you need, Mr. Coates (but you know that already!)….think about it…..to a warm, sunny, low tax state…. We are on this earth only ONCE….why stay for the VT Financial Armagedon? Federal law prohibits States from declaring bankruptcy…and the Federal Gov’t cannot bail out VT without bailing out ALL OTHER democrat states with far WORSE pension deficts. So WHO is left in VT to pay? There are only about 30,000 people who make over $100,00 a year. if Vermont CONFISCATED ALL their income AND put a wealth tax on top of that….it will still be a drop in the bucket to $4.6 billion needed! Vt is soon in very bad trouble.

  3. Pension deficits? Not worry, global warming, legalization of marijuana, same sex marriage are front and center. As for the pension fund any many other critical issues on the back burner or even not on the stove, we’ll get to them in our own sweet time. Nothing changes. The legislature is so bound up in it’s own priorities it ignore words from experts. David Coates is an excellent example.

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