By Guy Page
The stock market rocket that took off with the election of Donald Trump in November 2016 has brought some much-needed relief to one of the state of Vermont’s most painful, persistent problems: its troubled public pension funds.
Headliners has reported on how President Trump’s 2017 federal tax reform reduced Vermonters’ electricity and natural gas monthly bills, raised Vermonters’ after-tax income, and helped keep Vermont income tax rates low by increasing Vermont state revenue. But few Vermonters realize how the booming ‘Trump Stock Market’ has helped Vermont’s cash-poor public employee pension funds.
Vermont’s pension problem is big, scary stuff. About 54,000 working or retired Vermonters – teachers, state employees, and municipal employees – now or will rely on a pension from one of the three public pension funds. To date the funds have met their obligations, paying $337 million in benefits last year. But – the three funds have an “unfunded liability” of $2.46 billion. In laymen’s terms, the funds have committed $2.46 billion more than their total value. Besides making retired Vermont public employees justifiably nervous, servicing the debt ($121 million for 2018) costs Vermont taxpayers 25 cents on the dollar – an estimated $30 million/year. How it got this way and how to fix it is the subject of three brief, highly informative “Dialogues with Meg Hansen” podcast interviews with pension guru and lifelong Democrat David Coates of Colchester.
When a pension fund has unfunded liabilities, its managers can 1) add money (through taxpayer or employee contribution), and/or 2) improve investment return. The Trump administration indirectly has done both. The 2017 tax reform “added money” by contributing to an unexpected 2019 state revenue surplus, easing the pain when the Legislature allocated $34 million to reduce pension fund liability.
Understanding President Trump’s role in improving Vermont pension fund investment return involves a fairly simple exercise of “connect the dots.”
Dot Number One: Trump helped the stock market grow. The Dow Jones (key indicator of U.S. stock market value) was as low as 15,451 in January 2016 but closed at 18,332 on November 8, 2016, when Donald Trump was elected president. By Nov. 8 2017 it had jumped 28.5% to 23,557, according to Marketwatch. After a dip in 2018, the Dow rallied and as of this writing (8/26/19, 11:50 AM) is sitting pretty (despite trade-deal wobbles) at 25,809. Even CNN Money credited the president-elect for the post-election rally. Most financial observers say President Trump’s tax cuts, corporate income tax repatriation, regulatory rollbacks, and support of the domestic energy industry have been vital to the market’s success.
Dot Number Two: since 2016, the strong stock market has boosted Vermont pension fund value. A 2016 Pew Trust study shows that “equity investments and pension fund yields track closely.” This is common knowledge on Wall Street and one reason why Vermont Treasurer Beth Pearce in 2016 refused then-Gov. Peter Shumlin’s badgering to divest the pension funds of blue-chip fossil fuel energy stocks. The better your portfolio performance, the more money you have to pay pensioners.
And the stock market has been very, very good for the Vermont pension fund in the last three years. For example, from March 2016 to March 2019, the S&P 500 stocks in the Vermont State Employees fund returned an annual rate of 13.5% (page 32). Because the stock market only took off in the last quarter of 2016, that figure probably understates the fund value of the “Trump effect.”
While the Vermont Pension Investment Committee (VPIC) strives for investment diversity to protect pensioners from the negative effects of an up and down stock market, there’s no doubt that strong markets in recent years have had a beneficial impact on pension fund value, VPIC board chairman Tom Golanka said in a phone interview today.
Here’s another illustration of how a strong stock market impacts overall rate of return for pension funds. Below is the “annual money-weight rate of return, net of investment expense” for the three pension funds over the last four years, as sourced from State of Vermont documents:
VERMONT STATE EMPLOYEES RETIREMENT SYSTEM
2018 – 6.73%. 2017 – 10.33%. 2016 – 1.44%. 2015 – 0.50%
STATE TEACHERS’ RETIREMENT SYSTEM
2018 – 6.99%. 2017 – 10.17%. 2016 – 1.69%. 2015 – 0.40%.
VERMONT MUNICIPAL EMPLOYEES RETIREMENT SYSTEM
2018 – 6.75%. 2017 – 10.88%. 2016 – 1.56%. 2015 – 0.51%
Vermont’s pension woes aren’t over, of course. Far from it! But it’s sobering to think about how much worse off Vermont public pensioners would have been without the strong Trump stock market. The saying “a rising tide lifts all boats” is well-understood by anyone with a pension fund. As is its corollary: “a falling tide leaves them high and dry.”
Statehouse Headliners is intended primarily to educate, not advocate. It is e-mailed to an ever-growing list of interested Vermonters, public officials and media. Guy Page is affiliated with the Vermont Energy Partnership; the Vermont Alliance for Ethical Healthcare; and Physicians, Families and Friends for a Better Vermont.