As discussed in a recent commentary suggesting Vermont’s pension system is likely underfunded by some $9 billion, this shortfall has been caused by decades of government abuse. Though progressives have faulted Republicans (including former Governor and Treasurer Jim Douglas), the facts are clear: public sector employees and their unions received the cooperation of progressive majorities in the Legislature and state agencies to expand current and future employment benefits far beyond the ability of the Vermont economy to support. At the same time, necessary financial investments to ensure the ability to meet these growing obligations were avoided using every accounting gimmick in the charlatan’s book.
Vermont has had Democrat treasurers for two decades, during which time yet more damage was done to pension assets due to poor management. Vermont’s pensions suffered severely in the 2007-2008 financial crisis, when the state was heavily invested in vulnerable equities. The pensions then withdrew large allocations of funds into less risky investments — and missed the stock market rebound that followed. It is only in the last year or two that pre-2007 asset levels have been restored: and those gains likely suffered from recent market vagaries. As Vermont’s Jan. 10, 2022 Pension Benefits, Design and Funding Task Force stated:
Unusually strong investment performance in FY2021 offset virtually all of the cumulative investment losses incurred in the previous decade, but the hole created by the Great Recession investment losses remains unfilled. (p. 27)
It is obvious that partisan politics (liberality with public coffers) created this fiscal calamity. Yet those of us who have for years called for increased pension contributions (which should be a non-partisan no-brainer) have been dismissed as partisan:
[Matthew] Cunningham-Cook … says that the anxiety about unfunded liabilities and the rush to cut benefits is part of a larger pattern playing out across the country. “Let’s be clear, this is a Republican agenda — a far right Republican agenda,” he says. … “The goal is to crush public sector unions, to allow Wall Street to have unfettered control over our democracy. And we’re seeing it play out at the state level in our little state of Vermont. And it’s a tragedy and Vermonters should be outraged about it.”
Huh? The unfunded pension liability now exceeds $6 billion, and conservative efforts to shield it from default are condemned as union-busting? The truth is that inflation, currency deterioration, and economic realities are callous toward pensioner suffering, and the perfect storm for a pension collapse has been crafted by heedless progressives who have thereby threatened much more than unions. Here is some economic and legal reality that appears lost on the progressives: the state of Vermont can and may have to default on obligations that exceed its ability to honor.
According to the Task Force, “Employer pension costs … are expected to grow faster than the State revenues available to pay them when assuming all actuarial assumptions will be consistently met moving forward.” Those actuarial assumptions went down the toilet when the stock market tanked last month, flushed further by steady inflationary tailwinds and unfolding recession. More fully and honestly funding pensions would have helped, not hurt, unionized labor.
Fiscal integrity is mathematical, not ideological. For more than two decades Vermont has unrealistically expanded employee benefits, perversely underestimated funding requirements, then failed to meet even those paltry contribution targets. Additionally, the funds have been poorly managed, yielding persistently below-market returns despite doling out above-market fees to fund managers. As Mr. Cunningham-Cook observed last year:
“The problem is the bottom-of-the-barrel investment performance of the pensions,” he argues. “The problem is risky, untested investment strategies like hedge funds and private equity that operate as black boxes that are not subject to any federal securities laws.” Cunningham-Cook says there’s not enough transparency into how public workers’ retirement money is being managed. And, he says, ….Vermont’s pension investments have been underperforming the market. If they’d been in more conservative, lower-fee index funds for the past 10 years, he says the funds would have made an extra $1.5 billion. ….“That’s really the crisis here,” he says. “When we look at the investment performance over the past decade, it’s a billion and a half dollars in missed returns. And that is real money, unlike unfunded liabilities, which is really fictive and futuristic.”
The wizardry at play is evident — will progressives dismiss the failure to fund future benefits promised to retirees as “fictive and futuristic” while claiming efforts to more fully fund them are a union-busting “tragedy” about which Vermonters should be “outraged”? The tragedy is in the fraud committed against retirees and state workers by those charged (and highly remunerated) to protect their interests.
If realistic future projections were applied to Vermont’s existing (post 2022-crash) pension investment portfolios, lower interest rates than the current 7% would be employed to project returns on investment, and unfunded liabilities would be more accurately estimated — and much higher than the $6.182 billion shortfall estimated as of 6/30/2020. Meanwhile, non-transitory inflationary pressures will increase benefit costs (especially medical care and COLA adjustments) and thus future liabilities, while shriveling the real value of future pension incomes (which never keep pace with underlying inflation — COLA is backward-looking).
This is now an official disaster, which our government officials officially ignore. 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. There must be a sober reckoning for this chronic mismanagement. And as Matthew Cunningham-Cook reveals, it truly is a very partisan problem.
Vermonters must come together on the math and find ways to fund realistic promises to our public servants, who are torn in a tug of war between bureaucrats and taxpayers. We must find nonpartisan solutions before this crisis becomes intractable. We must not permit Wall Street — or the bloated Vermont State House dome — to have unfettered control over our democracy.
Vermont’s state pensions are a tragedy, and Vermonters should be outraged about it.
John Klar is an attorney and farmer residing in Brookfield. © Copyright True North Reports 2022. All rights reserved.