Funding shortfall represents the single greatest risk to the financial integrity of the system

by Robert Maynard

“This funding shortfall represents the single greatest risk to the financial integrity of the system.”  This November 2011 quote from State Treasurer Beth Pearce was part of an Ethan Allen Institute sponsored presentation by David Coates on the fiscal crisis represented by the state’s unfunded liabilities.  The presentation was given last Tuesday to a standing room only crowd at the University Amphitheatre in the Sheraton Burlington Conference Center.  Given the magnitude of the problem suggested by the above quote, one would think that the topic would be at the top of our political discussion.  Unfortunately, our current political leaders have really paid little attention to the issue.  This deserves to be put front and center in the coming campaigns.  It would be harder to ignore the message if our political leaders felt some heat on this.  Before going into that message in more detail, I would like to introduce the messenger.

David Coates CPA serves on the Commission on the Design and Funding of Retirement and Retiree Health Benefits Plans for State Employees and Teachers, as well as the Governor’s Council of Economic Advisors, the Governor’s Advisory Board for Economic Development, the Vermont Debt Affordability Advisory Committee, and the Vermont Municipal Bond Bank.

In his business career, Coates was managing partner of KPMG’s Burlington office. He has served on the board of the National Life Group since 1993, and has also held key leadership positions at the New England Culinary Institute. Coates is a Director of Green Mountain Power Corp., A.N. Deringer, Inc., and the Lake Champlain Maritime Museum. The Vermont Chamber of Commerce named Coates as its Citizen of the Year in 2003.

Now, lets take a look at the message.  Mr. Coates started out by noting that the total unfunded liability for Vermont’s teachers and state workers as of June 30 2011 was about $3 billion, as opposed to $2.7 billion for June 2009.  When broken down this figure includes $1.2 billion for unfunded pensions and $1.8 billion for unfunded retiree health care benefits for 2011 and $1.1 billion and $1.6 billion for 2009.  In other words, the problem is increasing.  When broken down by total unfunded liabilities from state employees and teachers respectively, the figures are $1.4 billion for state employees and $1.6 billion for teachers.

As Mr. Coates points out, the unfunded pension liabilities need to be considered on an equal footing with other obligations.  The total general fund revenue amounts to about $1.2 billion.  We have $3.2 billion total assets with $1.6 billion in liabilities, with a net of $1.6 billion worth of assets.  As of June 30 2011 the pension fund assets for state workers are 79.6% funded.  This is not where the problem resides as the standard is 80%, so this fund is not as much of a concern.  The pension fund assets for teachers, as of the same year, is 63.8% funded.  This is well below the accepted standard and represents a problem.  The total “Annual Required Contribution” for state workers and teachers combined was $92 million for June 30 2011.  The actual amount paid was $88 million, for  $4 million shortfall.   There is a projected surplus for 2013 of $5 million.  This looks manageable if the projection is accurate, but the real problem lies in health care benefits.

As of June 30 2011, the combined health care benefits annual required contribution for state workers and teachers was $109 million.  This is supposed to be a pay as you go system.  The actual payments made were $27 million for state workers and nothing for teachers.  There is not even a separate fund set up for teachers.  Their health care benefits are being taken from their pension fund.  This $82 million shortfall is projected to be $89 million by June of 2013.  Vermont, we have a problem.  Here are some of the proposed solutions presented:

  • Change to a Defined Contribution Plan (401(K) Type)
  • Eliminate health care benefits for new state ad teacher retirees, but not existing retirees
  • Require state workers and teachers to shoulder more of the annual benefits cost
  • Tie pension and retiree health care eligibility to Social Security retirement age
  • Eliminate cost of living increases on pension
In short, there are potential solutions to this looming crisis, but we need to muster the political will to adopt those solutions.  That is not likely to happen unless we all put pressure on those seeking public office.  Other states are starting to address the fiscal tsunami that unfunded liabilities present but here in Vermont it is hardly a part of our political conversation.