Roper: Will bond downgrade spark pension reform?

By Rob Roper

On Oct. 23, Moody’s, the investors credit service, downgraded Vermont’s bond rating from AAA to Aa1. This has significant implications for the state’s ability to borrow money and the cost of doing so. The reasons Moody’s cited for the downgrade were “low growth prospects from an aging population,” and “debt and unfunded post-employment obligations relative to GDP.” This last point is in reference to Vermont’s unfunded pension liabilities of $4.5 billion.

Rob Roper

Rob Roper is the president of the Ethan Allen Institute.

The pension crisis is an issue has been simmering below the public radar for years. Although huge in its potential consequences, it has not received a lot of critical attention for a number of reasons. One, politicians want to avoid it because it is expensive to fix, which can only anger taxpayers and/or beneficiaries of cut programs, and politically complicated as it affects the powerful public employee unions, who don’t want the system, which provides very generous benefits, changed. The other is it is not a particularly sexy issue for the news media; about as fun and interesting for most people as figuring out your taxes, and for most of us more complicated.

Hopefully this credit downgrade provides the shock necessary to change this denial dynamic and spur all parties to get serious about reforming the system. It can be done. Look at Rhode Island.

Rhode Island is a state that has a lot in common with Vermont. It is a small New England state with an aging population and an overall population that is in decline. (In the last Census, Vermont and Rhode Island were the only two states that experienced an actual population loss.) It has little economic growth, and its governance is overwhelmingly dominated by Democrats.

In 2011, Rhode Island found itself dealing with a pension crisis similar to Vermont’s today: long neglected, politically challenging, but ready to explode. The state of a little over one million residents had unfunded pension liabilities of $6.8 billion, compared to Vermont today of 623,000 residents and $4.5 billion in liabilities. Rhode Island also had a moderate Republican turned Independent Governor and a Democratic Treasurer who, either out of good governance or sheer necessity, were willing to take up the challenge of fixing the problem.

What they accomplished was a complete overhaul of the state’s pension system in The Rhode Island Retirement Security Act (RIRSA) of 2011, which went into effect in 2012. According to an excellent forty-two page summary of the process and the end product done by The Reason Foundation, RIRSA had five major planks: “1. A suspension of cost-of-living adjustments until the pension system reaches a combined 80 percent funding level; 2. A new defined-contribution plan to work in tandem with the current defined-benefit pension plan; 3. An increase in retirement age for current employees; 4. A change to the amortization rate of liabilities, and 5. A plan to help local governments bring their unfunded pension liabilities under control.”

Not to say that this was without controversy. After RIRSA passed, several state and municipal unions sued to block the law from taking effect. This led to a settlement in 2015, which “included two one-time stipends payable to all current retirees; an increased cost-of-living adjustment cap for current retirees; and lowering the retirement age, which varies among participants depending on years of service.” (Pensions & Investments 5/29/18) Even this settlement was challenged and only just resolved in favor of the state this past spring.

But, for those politicians worried about the electoral consequences of tackling a tough “third rail” issue, it’s worth pointing out that the state treasurer in 2011, Gina Raimondo, is now Rhode Island’s governor.

For all its similarities, Rhode Island is different than Vermont and a Vermont solution would necessarily have to be tailored to fit our own unique circumstances. I offer this example only to illustrate that reform can and should be accomplished. As David Coates, Vermont’s local guru on pension issues, warned last February that, “In 2008 [Vermont’s] pension payment was 2.25 percent of revenues, in 2012 6.4 percent, in 2017 9.4 percent and in 2019 it will increase to 11.5 percent.” This is unsustainable, and the implications for all aspects of our government are dire. In that same piece, Coates also warned that failure to address these problems would inevitably lead to a downgrade in our state’s credit rating. Guess he was right. Hope our politicians take notice.

Rob Roper is president of the Ethan Allen Institute. He lives in Stowe.

4 thoughts on “Roper: Will bond downgrade spark pension reform?

  1. Thanks Rob for pointing out the changes made in RhodeIsland. You are correct that the similarities between the two states show Vermont can tackle this issue successfully. I spent many years on the House Ways and Means Committee and during that time spoke with Rhode Island legislators who realized the path was going to be rocky, but it had to be traveled. In our own statehouse I argued many times that we should not let this issue go ignored, but state officials seemed to not understand the urgency. Other legislators did not understand even the basics of pensions. And this was one of several issues I was not allowed to discuss in caucus. Let’s hope the time for change has arrived.

  2. Neil… It’s important to remember that it’s not just the Dems – The Rs were also complicit starting with Gov Douglas who signed those budgets. Some of his proposed budgets reduced the payments below what was required.

    Back around 2005 – the Senate Gov Ops committee actually passed legislation that reset the actuaries and lowered the annual state contributions. And please remember, the state employees have always paid in as required and it has increased.

    All I’m saying is it wrong to point the finger at one side – both were involved.


    • Vermont is currently sending school funding money to developers across the state. Yeah, we’re having to close schools, not fund our retirement accounts meanwhile the state is sending “free money” to developers across the state. When will the insanity stop?

      Oh, they are sophisticated, they call it TIF funding, but make no mistake it’s property tax money that should be funding our schools, but it’s going to such things as parking garages, “town centers” and many other things that voters would never pay for if it were their own money.

      Joey doesn’t need that lunch money anyway.

  3. The Democratic majority has been underfunding the pension of their loyal voters for at least 20 years. This falls completely on the shoulders of Democratic leadership, buying the electorate with promises they couldn’t and haven’t kept for 20 years. They have put everyone in the state in debt. My understanding is it’s not even based upon your life’s work, but the last few highest paying years. How is that fair to the rest of Vermont? How is that fair to someone who had a bad couple yeas before retirement.

    I’ve come to the conclusion that Vermont is MORE like Washington D.C. than any other state. We have one of the lowest ethics grades in the entire nation. We have proportionately the largest scandals, think EB-5, Little town of Coventry missing 1.3 million, permit wars where it’s taken Costco 10 years to get a permit and then told you need to redo the entire interstate exit system before you can pump gas.

    Our incumbent politicians are so entirely rich NOBODY can challenge them. We have non-profits hiding lobbyists, lobbyists and state employees that operate through revolving doors. Outside money runs rampant in our little state and PAC money flows like the Winooski.

    The partisanship is the worst, it’s so bad nobody can have a discussion. Friends and family can no longer speak. Businesses and their owners are not inclined to post a sign or support for fear of economic retaliation within a town.

    The press in Vermont is totally controlled, beyond my wildest imagination, still find it hard to believe except for the 100’s of examples we’ve experienced first hand.

    We’ve started a new political party, such as to avoid the left wing and right wing of this goose called government. Our goals was to be the body of the bird, the center, where we could come together.

    Our prediction, we won’t do anything about the down grade, we won’t do anything about the retirement either. We, Vermonters are stuck in a deep, deep rut, that froze the night before and is keeping us on the same track.

    We need sunlight to dry our dirt road, we need to jump this rut. We hope you join us in yanking the conversation (steering wheel) and getting us back on course.

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