For the last several years, I have been working to raise awareness in Vermont about the challenge we face with pension and retiree health care costs. There has been no shortage of national attention on these issues. In July, we all saw Detroit follow a string of cities and towns across the country, from Pennsylvania to California to Rhode Island and Alabama, in declaring bankruptcy as a way of restructuring or eliminating their obligations to employeesí retirement. What was once unthinkable is becoming a trend.
As I have previously stated, Vermontís combined unfunded pension and retiree health care costs of $3.2 billion (for state workers and teachers) is not sustainable. Each year the state underfunds more than $80 million of required retiree health care contributions. To date, no one has put forth a realistic solution other than the one I proposed that dedicated the potential Internet sales tax currently under consideration in Washington.
The announcement of impasse in the Vermont State Colleges contract negotiation with the VSC Staff Federation highlights these challenges. While the Vermont State Colleges do not have a pension obligation (they moved to a defined contribution retirement plan many years ago), they have a post-retirement employee health insurance obligation that stands at roughly $144 million. It is small relative to Vermontís as a whole, but left unattended, the post-retirement health care obligation will inevitably affect the VSCís ability to keep tuition affordable and make the investments necessary to serve Vermonters well.
Let me help put this $144 million in perspective. The unfunded pension and retiree health care benefits for Detroit ($3.5 billion) on a per-capita basis is $5,000. Vermontís ($3.2 billion) is $5,100. The $144 million owed by the VSC on a per-student basis is over $11,000 ó thatís right, $11,000 per student. Even acknowledging that the student population is limited by time in a way that population of a city or a state is not, this debt stands as a substantial obligation relative to those who pay the revenue.
Without a funding source this debt will continue to grow and reduce the net assets (equity) of the VSC and could, over a period of about 10 years, create negative net assets (equity). This is not something that the state of Vermont, the VSC board of trustees, the students of the five colleges or anyone employed by the colleges would view as positive. Imagine a system of public colleges underwater on their debt. Of course, the $144 million obligation could be covered if the state substantially increased its appropriation or if VSC tuition went up dramatically. Both highly unlikely scenarios.
Chancellor Tim Donovanís approach was to try to build a consensus strategy that contained the liability over a period of years. Responsibility for funding the strategy would be shared between management and employee groups, including all unions and the non-bargaining-unit employees. The plan commits a portion of college revenue to a post-retirement health insurance trust fund. It also calls for closing the group, meaning no new employees would be eligible for post-retirement health benefits, and adjusting the premium obligation for those currently employed but not yet eligible to retire. Finally, the plan redirects a quarter of the retirement contribution from the defined contribution retirement program to the trust fund.
The plan is a smart, balanced approach that preserves an otherwise endangered and unsustainable benefit with every stakeholder shouldering some share of the burden.
The chancellorís approach is reasonable and achievable. It is sustainable and clearly represents the path of fiscal responsibility. Not coming to a fair and responsible agreement now will only require a much more draconian approach to post-retirement health insurance obligations in the coming years.
By the way, I did a quick search of some other colleges and universities in the state and found no other institution offering this type of benefit. Some did in the past but have since revised them ó for obvious reasons.
David Coates is a retired managing partner of KPMG Vermont.
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