John Klar: Are Vermont’s state pensions safe?

I have been writing for a number of years about the dangers of underfunding Vermont’s state pensions system. I have observed that the pensions suffered from unrealistic future earnings projections on investments that resulted in persistent underfunding, and high management fees.

Recently, Vermont Sen. Jeannette White criticized my positions in a public statement in which she claims Vermont’s pensions are now on “firm footing,” but in which she made several misstatements of fact. My question has been: Why do state representatives mislead voters this way, and when will the reality of math come home to roost?

John Klar

In a campaign against me, Sen. White wrote: “Recently John Klar has put out an ad with misinformation regarding the state’s pension funds. What Mr. Klar is saying is simply not true. It is a scare tactic to gain your vote by implying that he would be able to save the system. Do not be fooled. The system is healthy.”

Actually, what I have been saying is precisely true, and hardly a scare tactic. If anything, I suspect my observations (along with others) have been part of the impetus for the Legislature to take up the issue and fix the problem. Jeanette White’s statement essentially confirmed my arguments, stating: “The pension funds for state employees and teachers were in jeopardy — due to errors made over 15 years ago in calculating the return on investment and some due to inadequate contributions by both employers and employees — but never due to purposeful mismanagement and neglect, as Klar alleges.”

I alleged it was neglected due to the so-called “errors” (these were not errors, but absurdly rosy projections which enabled the Legislature to divert funding to other boondoggle spending). But I never said it was “purposeful.” Regardless of the senator’s wrong claim, my latest articles addressed the steep decline in the stock market after the Legislature “fixed” the problem. Sen. White though misrepresented that fact:

Without going into detail the result put us in a position where the funds are not in jeopardy as Mr. Klar would have us believe. Structural changes were made to contributions, cost of living, retiring the “mortgage.”  state investments, etc.  As a result millions will be saved to the state over the next few years and our pension funds are now on firm footing.  … Our work has shored up our public pensions, helping make it sustainable and healthy into the future.

Problem is, the national stock market plummeted after all this last minute repair work — the point of my article. Sen. White uses the pre-drop “fix” to argue that my analysis of the subsequent market decline was errant. I wrote:

The markets have tanked sharply since this pension fix was unveiled. The Dow Jones dropped 21.7% from Jan. 5 to May 20, rebounding by May 30 to present a net loss of 16.7%. If that rate was suffered by Vermont’s (historically underperforming) equities, then the state’s pensions just took a $673,003,320 hit to principal ($4,029,960,000 x 16.7%). Maybe the Vermont Treasurer’s office will provide a current update.

It is true that since I wrote this article the stock market rebounded, but state reports reflect a net annual loss of assets through June of 2022 of 7.42% (p.69) on the Vermont State Employees Retirement System (VSERS); a total loss of 7.41% (p.82) in the Vermont State Teachers Retirement System (VSTRS); and a loss of 7.88% (p.53) in the Vermont Municipal Employees Retirement System (VMERS). These are real numbers, that equate to a loss of $56,743,055 from VSTRS; $123,261,123 from VSERS; and $71,017,295 from VMERS. That’s a total loss from June 30, 2021 (p. 12) to June 30, 2022 (p.13) of $251,021,197.

Sen. White claims the pensions are “fixed” after losing $251 million dollars after she claims the Legislature fixed the problem. I wrote to her to inquire how she could claim I was being dishonest with scare tactics, and she responded:

Yes, there was a loss in 2022 in the pension funds as in all other investments. But VPIC invests for the long haul.  A couple years ago there was a huge increase in the returns, now a loss. There is what is called a smoothing process so that the yearly ups and downs do not dictate our actions.  So your projections are based on the current trend continuing over the next years. If you had used the returns from two years ago you would have had an entirely different outcome.

Only, this is poppycock — I did not base my projections on the trend continuing over the next years, I simply recalculated the shortfall using the 7% projection that she and the pension system apply to earnings on existing pension assets. If “the current trend continued,” and I had employed that figure, the number would be far worse — losing principle at the rate of more than 7% annually! The “smoothing process” has zero to do with my calculations — will the $251 million loss for the year “dictate our actions”? Will it “smooth out”?

As I have written, employing rosy projections for existing assets is fantasy math not based on historical returns: I have been proved right. Indeed, the stock markets plummeted even further after June 30, then recently rebounded — what will June 30, 2023 look like for the state pensions? The markets are volatile, and inflation is roaring — neither of those problems is addressed by the so-called “fix” that Sen. White assures us made everything safe and secure, but which preceded both these stock market declines and inflation. Was Sen. White just employing a political tactic to gain votes by assuring Vermonters the pensions are not at risk? Do not be fooled: the system is unhealthy.

I repeat what I observed in my last pensions article: Perhaps the state of Vermont will take up the pensions issue again in the next legislative session, when the ravages of food, fuel and monetary inflation have forced themselves into the awareness of those dithering while the pensions burn.

Pensions benefits and costs will rise, even though assets are down $251 million. Given the election results, Vermont’s state bureaucracy is now in the full veto-proof grip of “smoothing-talker” progressives, who can take full credit and responsibility for “fixing” the state pensions.

John Klar is an attorney and farmer residing in Brookfield. © Copyright True North Reports 2022. All rights reserved.

19 thoughts on “John Klar: Are Vermont’s state pensions safe?

  1. The problems with the state pension start with the nature of the beast– it is a “defined benefit” rather than a “defined contribution” fund.

    “Defined contribution” is a cruel trick to play upon workers The worker gets back what they put into it, but Wall Street helps itself to as much as 50% of what is put in before handing back to the worker the remains and the interest those remains might have generated. As the average worker knows as much about investing as I do about Hottentot fertility rituals and the average investment counselor has to base his advice on daily barrages of lies from Wall Street, the chances are close to zero of getting more income from this sort of pension than from Social Security.

    “Defined benefits” gives the worker more firepower for their retirement. As the company has skin in the game, it will use its resources to ensure that someone trustworthy, skilled and experienced in the Wall Street maze is overlooking the investment. This gives the worker the equivalent of a Big Buddy in the school halls. When the Street starts playing games (e.g, issuing IOU’s allowing them to hold up a bank, otherwise known as “high yield bonds”), employers will have a vested interest in having their lobbying group get some Congressional protection– something the average schlub on the assembly line could never do or even recognize as necessary. Furthermore, the wise worker will value the sacrifice in immediate benefit– the bigger paycheck- for the long-term good and choose to work for less income than would be available in the other market (which is why Vermont state workers are in general paid less than their skills would earn them in the private sector).

    Finally, as employers realize that their obligations include mandatory profitability in order to fund those pensions, the smart ones make decisions which take that long-term obligation into account. This includes ensuring the state brings the hammer down on their competitors which seek unfair advantage by screwing over their employees’ pension fund. The not-so-smart ones do what they can to ensure their workers join the race to the bottom.

    • “mandatory profitability’…. ??????. Now there’s a logical progression. Why didn’t I think of it?

      “Shades of “Atlas Shrugged”. Directive 10-289 from Wesley Mouch and the ‘Office of Economic Planning and Natural Resources’ redux.

      A question for you cgregory… what language describes a ‘profitability mandate’? Slavery, perhaps?

      • In the “free market” construct, it is known that companies that don’t experience profitability die. This is why in the realm of the Invisible Hand, it is mandatory for them to be profitable. That is your “profitability mandate.”

        If you need further explanation, talk to the hand.

        • Exactly. So what does that have to do the difference between a ‘guaranteed benefit’ program and a ‘guaranteed contribution’ program. If the businesses providing ‘guaranteed benefits’ go bankrupt, what then?

        • If the businesses providing ‘guaranteed benefits’ go bankrupt, what then?

          Crickets from cgregory…

          • Bankruptcy is a different issue. What we’re talking about here is the difference between the two different types of pensions.

    • “Defined contribution” is a cruel trick to play upon workers.”

      “Defined benefits” is a cruel trick to play on taxpayers.

      • Well, yeah. We definitely do not want to have workers knowing that when they retire not only will they have a cash payment under defined benefits, but they will also have such added benefits as dental and health care. To allow them to have that would be a cruel trick indeed. Glad you brought that to my attention.

  2. Everyone, including Mr. Klar, is missing the underlying problem with the State’s pension system. The problem isn’t the investments or mistakenly projected values.

    The problem is that the State’s pensions are GUARANTEED BENEFIT programs. Regardless of the investment, it is the taxpayer that guarantees the result.

    Every investment broker I know emphasizes the disclaimer that PAST PERFORMANCE IS NO GUARANTY OF FUTURE RESULTS. So why does the State, on behalf of the taxpayer, provide the guaranty of future results when the investments they purchase don’t provide that guaranty?

    There are a couple of answers.

    First: The legislators with whom I’ve communicated are economic incompetents. They have no idea what I’m talking about. They wouldn’t know a ‘guaranteed benefit’ program from a ‘guaranteed contribution’ program if it hit them in the backside.

    Or: The legislators know full well the difference between these two investment structures, and the advantages the ‘guaranteed benefit’ program provides its beneficiaries…, and the liability it places on the taxpayer. They know full well that it’s impossible to ‘project’ an investments future value with any certainty.

    So, why do they do it? Why do they continue to offer a pension program, with the investment returns being guaranteed only by taxpayers?

    Because they are beholden to the union members and special interest groups who contribute to their political campaigns. These legislators are not beholden to the taxpayers who are ultimately responsible to back the guaranty. And, they know most taxpayers, apparently like many on this forum, don’t understand the difference between the two pension systems either, or their proportional risks.

    Smarten up folks.

    • Let’s not forget that it is also the taxpayer who guarantees the result of them getting paid for their work. If we’re going to grudge them post-employment benefits, we shouldn’t stop there; we should eliminate their pay as well (sorry, but I couldn’t find the sarcasm font). One of the reasons they accept less than they could earn in the private sector for the same work is that they think in the long term, and a defined benefit pension is worth sacrificing for.

      Unlike private companies (in Springfield, it was vulture capitalist Goldman Industrial group which tried to raid the pension fund as as it stripped Bryant Grinder of its assets), the government will not go out of business (this is why government bonds are a popular investment). All Americans should insist that pension funds of both types be at or near the top of the creditor list in bankruptcy proceedings.

  3. Continuing with the same flawed thinking of White and others, without somehow separating form the rest of VT financial connections will only lead to bankruptcy with the whole state going with it.
    If that happens it will be John Klar’s fault, won’t it….. or some other Republican.

    • James you think: “….the rest of VT financial connections will only lead to bankruptcy with the whole state going with it.”

      FYI? STATES are not allowed to declare bankruptcy…against the law. Only “cities” are allowed to declare bankruptcy. So VT is screwed. At some point the “Piper Must Be Paid”…..and VT is so woke, it will soon enough be broke. VT Credit rating will nosedive to junk bond status, making it near impossible to issue needed $ debt reasonably.. At that point VT ony has two options…raise taxes MASSIVELY on the 20% of people who already PAY 65% of all income & Property taxes….and WATCH out for the the big one…Progressives will try for a WEALTH TAX – on top of all income & property taxes. That is when VT goes full boat Communist.

      So besides massive new taxation, the only other option is a Federal Bailout…but the Gov’t CANNOT set that precident…because if they bail out VT…they will have to bail out all other wastrel, Liberal states…..NY, CA, NJ and IL come to mind.

      Give it three years in VT, and you will “reap”, what they are “sowing” now in Montpelier.

      • Jeffrey why do you think that they had a “Pandemic”?
        What this was about was the payout that these failed blue states needed because like you said, they were bankrupt.
        Notice how the states in the worst financial trouble had the hardest and longest lockdowns?

        I remember back when Trump was President, they stopped serving meat in the schools in NYC on Mondays, it was sold as trying to save the planet..
        What it was really about was the city was so damned broke they couldn’t afford to serve meat 5 days a week..
        I mean this stuff IS out there, they can’t hide it.
        So in three years, I’m sure we’ll be hit with another scamdemic to solve the next problems..
        Because like Margaret Thatcher said, they surely do eventually run out of other peoples money..

      • The state may not go to Bankruptcy in the traditional sense, but this law you refer to will not stop the creditors from pulling in the paper.
        When that day comes, just watch all these dummies who have kicked cans down the road all these years head for the hills. and then watch the clamoring and eye gouging taking place to keep the state whole.
        This is an event that need not have been poised to today’s reality, but it did. Now, also will be a clamor for your money and mine.

  4. Senator Jeannette White once walked out of School Board meeting in Brattleboro before members of the board and public could ask questions of her concerning legislative discussions about teachers pensions, which was the reason she was invited to the meeting in the first place. Her other dealings with the board were also less than amicable. That she would criticize Mr. Klar because he had the temerity to rightly accuse the liberal Vermont legislature of purposeful mismanagement and neglect concerning the condition of the State Employees Retirement Fund is not surprising. As a long time State Employee, I can attest to the conversations we employees used to have about the legislature’s yearly lackadaisical attitude concerning funding the State Employees’ pension fund. And of late, and more frequently, there have been efforts on the part of certain legislators to force the pension fund investment programs to divest themselves of stocks in companies that don’t meet their ‘woke’ philosophy, and these are the companies whose stocks are the most profitable and helping to fill the funding gap created by the legislature’s “…purposeful mismanagement and neglect…” Senator White is quick to lay blame for the pension fund’s poor condition on anyone other than herself and her cronies.
    Mr. Klar is correct; Ms White is wrong, oh, so wrong.

  5. It is worse than that Mr. Klar. You focus on stocks being way down. But you miss that VT also has a large percentage of the pension money on BONDS…and bonds also have had the worst year in many, many decades…and then you also miss most large pensions also diversify and keep some assets in Real Estate…and that is in bad shape lately too..

    You miss one other “biggie”, Sir……stock markets. VT does “report” total dollars of “personal income” taxes they receive….but that is VERY DECEIVING….because personal “income taxes” (not corporate ones) come to VT from FOUR sources….1. Earned Income (salaries)…..2. Interest earned……3. Dividends…and the BIG Kahuna…..4. CAPITAL GAINS.

    Vermont only gives ONE NUMBER of “personal income tax revenue”…but VT does break down the personal CAPITAL GAINS contribution in that number. The truth is that VT is HIGHLY dependant on dividends & capital gains revenue….VT is full of trust funders and other wealthy folks…and has been for a long time… For the last few years as stocks exploded….these people made large CAPITAL GAINS…and VT took a large cut of them in taxes $$$….FREE MONEY….NO RISK TO VT….but now my guess is…just like pensions got killed $$….”VT personal income taxes” from Dividends and Capital Gains will be way down. Worse yet…even if you have very long term gain still, you will sell your pther stock losses now, againt the winners…and now you lose taxing the long held stuff, still with gains….POOF!.

    So VT get’s a DOUBLE whammy….hundreds of millions pension stock, bond losses…and a system in VT that hides personal income from dividends, interest and capital gains…. THE LEGISLATURE “cons” (obfuscates) everyone that VT is doing “great” under their leadership, because “personal income taxes” (wage & salary growth) to VT rise every year…but truth is those taxes are less of actual higher wage & salary taxes growing…but a big chunk is non disclosed dividends & capital gains from stocks- that come from maybe 15% of the VT population.. that will not be paid for 2022 taxes. Plus pension losses…plus no more free billions covid money?

    • Why should theirs be any safer then mine especially when they vote almost 100% for the biden imbecile’s string pullers that are causing the losses in ALL IRA’s and other retirement accounts. My account has taken a huge hit which will cause me to work longer now as I don’t know if there’s enough in it anylonger… I’m 73 and should be enjoying life instead of paying thru the nose in taxes and loosing my retirement funds.

      • DBean, you’re on to the problem. If your retirement funds, and everyone else’s for that matter, can rise and fall with economic cycles, why are the State pension results guaranteed by taxpayers, not the people making the investments in the first place?

        Answer: see my comment above.

        • There is more to the problem Jay..
          Look at this as a voter block..then consider the size of it in VT.
          And then a whole lot makes even more sense.

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