Legislative committees working to shore up teacher, state worker pension plans

March 20, 2021 | By Rep. Tom Stevens 

As I write, we have finished our work on Crossover Day, which is the last day we can pass bills that originated in our committees of jurisdiction and have them considered in the Senate (if they pass the full House) this session. 

Rep. Tom Stevens headshot. Courtesy photo.

It does not mean that we are done working on bills this session. There are a number of bills that we will pass that will be considered next year, and there a number of Senate bills that will come to the House. 

We will continue work on our revenue and expenditure bills, and we will continue to work on bills that relate to COVID-19 response, whether writing policy that will allow us to adapt to COVID-19 protocols, or to prepare for coming off of the emergency order. 

Importantly, we will be working on distributing and allocating funds from the federal government that will allow us to help Vermonters who continue to struggle through no fault of their own. Decisions on how those funds will be spent will not be made until later in the spring, and perhaps not until summer, as the federal government will be writing rules and regulations on that money for weeks to come.

One issue we have heard from you about is the state of the pension plans for state employees and teachers. We have been working toward a solution for years now, but the last year or so has been unkind to the status of the funds, and when state Treasurer Beth Pearce issued her annual report on the pensions in January, there was stark news that affects many constituents in our district. Please know that Reps. Theresa Wood, D-Waterbury, Jana Brown, D-Richmond, and I are working closely to with our leadership and our committees of jurisdiction in order to maintain lines of communication between them and you, and that we are working on your behalf to make sure, as much as possible, that we don’t renege on the promises we made to these essential workers on all of our behalf.

My focus here is on the teacher retirement system, but the fundamental issues are similar for state employee retirement as well. 

Bottom line: The unpaid liabilities in the funds have ballooned, and are requiring us to pay into the funds at an exponentially higher rate than we did just a year ago. The unpaid liabilities in the systems resulted from underfunding during multiple administrations more than a decade ago — and left us with explosive increases that use Education and General Fund money that cannot be used for the many things that we are currently underfunding from housing to childcare to health care.  

When the legislature was forced to deal with determining a solution in the late 2000s, a 30-year actuarial plan to erase the liability by 2038 was established. At that time, both teacher and state contributions to the system were increased. Despite that and despite appropriation of the requested amount (or more) for the Actuarially Determined Employer Contribution (ADEC) since 2008, the liability has grown — rather than shrinking as anticipated.

The great recession was a setback and historically low interest rates have affected the investment returns. This is reflected in the new assumptions of lower rates of return in the future, which increases the unfunded liability to the accounts for 23% of the newly projected shortfall. State statute requires that an experience study be conducted at least every five years to review and reset the assumptions as needed. Actuarial assumption changes including length of life after retirement and workforce changes have been updated, accounting for 50% of the increased liability. Additionally, a larger number of teachers retired in the past several years than had been anticipated increasing payout from the system.

These actuarial changes lead to a large increase in the Education Fund payment to the retirement system for currently employed teachers. That is an increase from $6.9 million in fiscal year 2021 to $38.9 million in the budget being built for fiscal year 2022. This is money that comes out of the Education Fund. The Ways and Means Committee is committed to fully fund this amount. That still leaves us to consider the unfunded liability which has increased to nearly $2 billion.

The report by the state treasurer proposes several changes to address the shortfall. It is important to note that the treasurer rejected the most radical changes, such as abandoning the traditional retirement system, or defined benefit plan, and changing to a defined contribution plan where there is no pension guarantee. Also, any changes would not involve retired teachers or those within 5-10 years of retirement.  

What she has proposed, and what the relevant committees are reviewing right now, are changes that may include an increase in teacher contribution of 2% of salary above current contribution level, removal of the cost of living adjustment for retirement payments above the first $15,000 to $24,000, universal application of the rule of 90, and increasing the average final compensation calculation to 7 years from 5. These changes together would not solve the problem, but would reduce the unfunded liability by approximately 60% of the needed reduction. Additional state contributions will be needed in addition to any of these measures.

I want to make it clear that these proposals are not close to being implemented. We continue to hear from our constituents, and we are working with Treasurer Pearce and the unions to make sure this problem is not solved on the backs of our employees and teachers. They did not cause the problem. The situation is disturbing and a significant challenge. There will be no single solution but making no changes is not an option.  

We do not anticipate the legislature agreeing to most of these changes suggested by the treasurer, and we have an extremely long road ahead to make sure we correct the problem in a way that does not do damage to either our state workforce or our teachers. 

As always, please stay in touch. Your thoughts on the multitude of issues we are dealing with are welcome.

Rep. Tom Stevens, D-Waterbury, is chair of the House Committee on General, Housing and Military Affairs. Contact: tstevens@leg.state.vt.us