Whistling past the graveyard?

by Robert Maynard

A major difference in outlook on the stability of Vermont financial situation is being presented by the two major candidates for State Treasurer.  A recent article by the Burlington Free Press entitled “Confident versus concerned in Vermont treasurer’s race” spells out the contrast in how Democratic incumbent Beth Pearce sees the situation versus how her Republic challenger Wendy Wilton does.  While Wendy Wilton was raising issues of concern over our state’s long term financial situation, Beth Peace seemed to be singing her own version of “Don’t worry, be happy”.  Or, as the Free Press article puts it:

Beth Pearce, the Democratic incumbent by virtue of being appointed to the job in 2011, sees the state on a safe and solid financial path. The picture she paints for voters was bolstered, she points out, by a recent positive evaluation from a national organization that rates the state’s financial health and risk for investors considering whether to buy the state’s bonds.

Wendy Wilton, the Republican challenger, sees the state’s financial path as much more problematic, potentially undermined by pension problems, budget shortfalls and over-reliance on federal funding. She suggests Pearce has done too little to address these risks.

In particular, the two differed over whether previous reform efforts have been sufficient to address the pension problems.  Pearce seems to think that they have:

Pearce contends she and her predecessor have worked on the problem since 2005. Reforms have been enacted that change, for example, when workers can retire and how much they pay toward their retirement.

The Center for State and Local Government Excellence published a case study detailing how Vermont negotiated with teachers to make changes that saved $15 million in the first year, Pearce noted.

Wilton, while acknowledging that some reform was undertaken, does not see such efforts as sufficient:

“Yeah, there was some reform. It was reform in the right direction, but at the end of the day it wasn’t enough to really move the dial,” Wilton countered. “There is more work to do on structural reform on these two pensions.”

She says she’s skeptical the Legislature will appropriate the money required year after year through 2038, given the still uncertain economy and the possibility the state could lose significant federal funding as Congress addresses the national deficit.

Vermonters should take more of an interest in this debate because it is crucial to our future.  Are our fiscal matters in order and do we have reason to be confident as Pearce would suggest, or is there a problem and do we have reasons for concern, as Wilton would indicate?  Given that Pearce is the incumbent and Wilton is the challenger the contrast in their perspectives should come as no surprise.  In order to evaluate these two opposing perspectives, it might be a good idea to take a look at a neutral perspective from someone intimately familiar with such issues.  Back in June I reported on a fiscal presentation by David Coates in a TNR article entitled “Funding shortfall represents the single greatest risk to the financial integrity of the system“.  Mr. Coates fits the bill of “someone intimately familiar with such issues.”  He is a CPA who 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 Mr. Coates presentation he painted a picture of the funding shortfall of the liabilities owed to state employees as a crisis matter that few in Montpelier were willing to address.  According to his numbers the problem is getting worse:

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.

The problem is particularly worrisome for 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.

Given the rate at which the number of workers in Vermont employed by state government is increasing, the long term problem may be even worse than even Mr. Coates is suggesting.  A recent Burlington Free Press article by economist Art Woolf shined some light on this trend:

In 1997, Vermont’s overall public employment wasn’t much different than the average state. Today, Vermont’s state and local governments employ significantly more people than the average state. Since a large share of government expenditures — especially at the local level—are for employee wages and benefits, a high level of government employment translates directly into a need for high tax revenues.

It is not just our tax burden that is increased by our move towards bigger government.  The crisis related to the funding of state employees pensions and other benefits becomes even more a matter of concern  as government employees become an even bigger percentage of Vermont’s total workforce.  This increasing burden is going to accelerate exponentially as the state government takes over our healthcare system as it is poised to do under the proposed Shumlincare plan.  On top of that, health care is not the only area in which Shumlin and his Democratic allies plan on expanding the role of state government.

In his presentation Mr. Coates painted a picture of Beth Pearce as concerned about the problem and quoted a statement made by here in November of 2011: “This funding shortfall represents the single greatest risk to the financial integrity of the system.” A good question to ask Beth Pearce is whether she still feels that way, or has she joined in with the Administration that appointed her in whistling past the graveyard?