John Klar: Vermont’s ongoing pension saga

John Klar

After years of neglect, Vermont recently undertook to shore up its underfunded, overpromising pensions system in Act 114. Unfortunately, the vulnerabilities that many of us have been writing about for years have surely exposed the pensions system to a profound blow from the recent stock market slide — the Act 114 “fix” will not come close to fixing this problem.

There are two long-term failures of Vermont’s pensions: overpromising of benefits and underfunding of assets. The unions and state employees who benefit from Vermont’s swollen benefit offerings scream bloody murder if there is any attempt to curtail those promises, but they are the ones with everything to lose if it becomes unsustainable.

It has become unsustainable. Vermont’s Jan. 10, 2022 Pension Benefits, Design and Funding Task Force reports:

Across all funds, the FY2022 pension ADEC expenditure is now larger than total appropriations for entire categories of state government functions. For a sense of scale, the $316.2 million of combined VSERS and VSTRS ADEC is more than state government spends on Labor, Debt Service, Commerce and Community Development, and Higher Education combined. … Employer pension costs, therefore, are expected to grow faster than the State revenues available to pay them when assuming all actuarial assumptions will be consistently met moving forward.  (at pp. 23, 25).

Meanwhile, the chronic shortfalls by the Legislature have snowballed:

The accrued liabilities of both pension systems have grown faster than plan assets. As a result, the gap between what the pension systems expect to pay out in future benefits and the assets the systems have available to pay out those benefits (the unfunded liabilities) have grown, and the funded ratios of both pension systems have steadily declined. (p. 14)

According to the report, as of June 30, 2020, the combined assets of the state’s pensions plans totaled $4.408 billion in assets, leaving a shortfall of $6.128 billion:

Vermont State Employees’ Retirement System The VSERS pension fund has an underfunded liability of $1.064 billion and health care benefits is higher still at $1.664 billion. … Vermont State Teachers’ Retirement System The VSTRS pension fund has an underfunded liability of $1.950 billion and health care benefits this is a bit lower at $1.504 billion. (pp. 38, 40).

To correct this massive problem, the Task Force proposed the measures contained in Act 114, which adjusts retirement ages, contribution levels, and other aspects of the pensions systems, while contributing $75 million to each pension in FY 2022 and $15 million each year after that (in addition to other contributions). But recent shifts in the U.S. stock market have likely wiped that rescue plan out entirely. Let’s examine some numbers for Vermont’s retirees.

A key problem over the decades has been Vermont’s idiotic use of an 8.25% future return (p. 29) on all asset investments when calculating pension asset balances. No one has ever earned that kind of a yield long term — the use of a high return rate artificially reduced the “unfunded liability” calculations, and allowed the Legislature to kick the can down the road (to today). Now the state is using a rate of 7% (p. 35), which remains unrealistic and is not “conservative” investment policy, but reckless.

We do not have current numbers for the pensions balance, but here is a (very rough) analysis. If the pensions held assets of $4.4 billion at June 30, 2020, (the total assets reflected in Figures 1a and 1b, p. 21) and allocations were implemented per the state’s plan of 71% to equities, and these grew or fell in value equal to the Dow Jones Industrial average, then Vermont’s approximate 3.124 billion in equity investments ($4.4 B x 71%) would have grown by Jan. 5, 2022 (the market’s peak, just days prior to the Report date) by 29%, to about $4,029,960,000.

However, bucking those 7%-a-year stock market assumptions, 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.

Perhaps the nation’s equity markets will quickly rebound. If not, the proposed $30 million per year of added contributions proposed by Act 114 is a drop in the bucket — it will take roughly 22 years of funding at those levels to get the state back to where it was in January 2022 under the example used, assuming no future market declines.

Remember that the state of Vermont has “assumed” that the $673,003,320 it just lost will earn 7% for the next 30 years, but those funds have now evaporated. But $673 million at 7% for the 22 years required to replace it totals $2,981,660,000, or another $3 billion in unfunded promises for state employees. (That is, any assets that disappeared from the balance sheet last month took a presumed 7% per year return for the future with them, increasing unfunded liabilities by the same amount). Added to the Task Force’s calculated $6.182 billion shortfall, this would mean Vermont’s pensions system is now some $9 billion deficient in meeting future retiree promises – assuming all assets earn 7% every year forever, and that inflation does not bloat benefits (further increasing projected future liabilities)!

These numbers are used for explanatory discussion: the true condition of the pensions is likely much worse. Though this analysis has excluded other monies contributed to the plans, Vermonters must recall that ALL existing investments of $4.4 billion are assumed to yield 7% for all future time, and that is almost certainly impossible. No wonder Beth Pearce and many Progressive Democrats are abandoning ship – the irresponsible problems they have created are coming home to roost.

The recent drop in the market has already swept Act 114’s year-long intensive plan to shore up the pensions down river like a financial flash flood. Going back to the drawing board requires a more sober look at both benefits and contributions, which merits a more partisan assessment – how did Vermont’s pensions get so sickly in the two decades of exclusive oversight by Progressive lawmakers? And what bipartisan measures can be embraced to repair the damage, for the benefit of pensioners and taxpayers alike?

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

7 thoughts on “John Klar: Vermont’s ongoing pension saga

  1. I would like to know what the new agreement does for COLA percents and age change with the new bill? I have found NO info on them anywhere! I retired from Massachusetts and our cola is fixed at 3 percent of the first $13,000.00 period and when included in the governors budget, no higher!
    Another thing is when you invest in stupid companies similar to Solindra, Old Solar company that went out of business under the watchful eye of O Bama and went bankrupt, what would expect! They do not invest in Exon because of oil but check their dividend! Their investment plan is fraud, not on income but on the green idea, crazy ! The purpose of the investment is Return, not as Spike Lee says, do the right thing!

  2. add all this to our leaders feeling “there are too many 65+ yr olds in state and not enough 20-40y olds”
    and well…….no choice but to leave this state; as many including myself are doing……

  3. Vermont’s unfunded “liabilities “, Vermont’s legislators keep kicking the can down the
    road, I guess they think the ” Money Fairy ” will adjust and fix this sinkhole !!

    Until we have some sort of common sense thinking in Montpelier, like how to balance
    a budget, most taxpayers know how to do it, I guess this pack of geniuses failed their
    math class ……. If they need help we ” taxpayers ” are willing to show them how !!

    There should be no more legislation passed that is requesting money unless they stop
    a current spending boondoggle bill, yes we ” taxpayers ” can help in pointing out what
    nonsense bills they support that need to be cut.

    I have lived in Vermont for over seventy years, I used to think the powers in Montpelier had
    a great brain trust……. not anymore, I was going to say pathetic, but inept came to mind !!

  4. John can’t you see why Americans are failing in Math? (and this isn’t solved)

    If speech is delayed from mask wearing and they can’t do math.. why balance budgets?
    Who can tell us they are wrong?

    This is the new Budget Plan!
    See no evil, hear no evil, speak no evil.

  5. It is all about Demographics…and the trend is not good. This quote from above: “Across all funds, the FY2022 pension ADEC expenditure is now larger than total appropriations for entire categories of state government functions.”

    I know people who can’t wait to retire and I bet many will leave VT for tax reasons, and tired of below zero & snow.. Get a Condo in a warm, low tax, sunny plave for “six-months-and a-day”, and you no longer have to pay income taxes in VT…nor can VT tax your Social Security. The KEY is ….1957 is the peak Baby Boom population year…which means 2022 is the peak year for them turning 65. And when they are 65 they can retire (or leave)…because many cannot afford to take earlier retirment because they need full their Social Security payment at 65…if you take it before and you get a much lower one, forever. But the biggie is Health insurance – if you retire before 65 & not Medicare ready…….it is hugely expensive to buy a stand alone individual policy if you are in your early 60’s.. So between Social Security and Health Insurance, most folks have no choice but to wait till 65 to retire. Because at 65 they qualify for very cheap Medicare insurance, they get their full Soacial Security payout…. and for those that have one….theiir PENSION is paid at 100% at full retirement age (65).

    This is why you see so much money going out of State pensions, vs in…..the VT baby boomers are turning 65… and retiring.. The unknown question? How many will LEAVE VT for six months and a day…(or leave forever)…when they do that (leave) they take all their life long gathered taxable financial assets with them…which only makes the outlook worse for VT….OH! The other thing killing VT pension assets is the Unions get cost of living/inflation increases. They will be large (and unplanned for by the state) for 2021, 2022 and maybe 2023. And those increased payouts COMPOUND up every year. I do not know any PRIVATE sector pensions that give ANNUAL cost of living/inflation increases. But Unions do.

    • One more point. One of my children is in the investment business and was involved with an S&P 500 company in their pansion management area. They had $20 billion in 401-k assets and $20 billion in defined pension assets….a very large company. But a handful year ago the mgmt of the fund told the Board of Directors that they have to LOWER their assumed annual pension percentage returns….from 6.0 % to now 4.5%. The Board got very angry…, because now the company had to reduce reported net income as they had to take money meant from their net income and shift large amounts $ to the pensions. This reduces the companies earnings per share. These guys are TOP managers….and they lowered their annual assumptions to 4.5% a good handful of years ago…..Vermont is insane, dumb or blind….to project a 7% rate of return annually… borders to a near legal civil liabilty negligence

      It is another reason that gives people a reason to leave…do it before income & property tax raises…. or that VT goes full Communist and proposes a ‘Wealth Tax”…Progressives have already bandied about that notion.

      • You are right about Demographics.. Elon Musk has been talking a whole lot about this lately too.
        If Elon has this on his mind, I think we all better tune into it.

Comments are closed.