MONTPELIER — Years of inadequate contributions to a pension fund for retired teachers have come home to roost in Vermont. And lawmakers will soon grapple with a shortfall that analysts say will cost an additional $20 million annually to fill.
In a briefing to legislators last week, State Treasurer Beth Pearce said the rising cost of health care has exacted a severe toll on a retired teachers pension fund in which contributions have failed to keep pace with expenses.
At issue specifically are the medical benefits due to current and future retirees, the costs of which have swelled from $4.1 million in fiscal year 2001 to $26.5 million in fiscal year 2014.
“The problem has been that we’re still not paying for health care on a current basis,” Pearce told lawmakers. “So it becomes a loss to the system, and then that loss is added to the unfunded liability and paid over time.”
Insufficient contributions on a year-to-year basis means pension fund managers are forced to dip into the corpus of the state’s $1.5 billion teachers pension fund to pay for current health care costs. Chipping away at the principal, Pearce said, compromises the fund’s ability to cover liabilities to which it’s already committed to paying in the future.
This year, Vermont will have to pull $20 million from the fund to pay for retiree health benefits. Pearce said that will cost taxpayers $58 million in lost investment income over the next 25 years, a practice she likened to putting basic household living expenses on a credit card.
“That is costing the taxpayers money,” Pearce said. “This is not a sustainable method of paying for health care.”
Pearce said Vermont instead needs to adopt a system for teachers similar to the one in place for state employees, wherein retiree benefits, by statute, are funded by a “pay-as-you-go” method. But with the gap between costs and contributions now at $20 million annually, the solution won’t come easily.
Pearce is meeting with administration officials, legislative leaders and representatives of the teachers union, Vermont-NEA, to craft a compromise that she says likely needs to include concessions from educators and increased appropriations from lawmakers.
The teachers pension fund pays for health coverage for the majority of the 7,700 teachers now receiving benefits from the program.
“We’re looking at any alternative that has an immediate impact on the cash position of the fund, whether it’s on the expense side or on the revenue side,” Pearce said.
She said finding the $20 million is the only way to resolve the “single-biggest threat” to the future stability of the teachers pension fund. She said the money should accrue to a separate trust that would account solely for the liabilities of the retiree medical plan, and that contributions to that plan should not be mingled with the funds being used to pay out base teacher pensions.
Lawmakers can’t afford to wait another year to take action, she said.
“We need to address this now,” Pearce said. “It’s getting to a critical point.”
Darren Allen, communications director for the Vermont-NEA, said that while the shortfall facing his members’ pension fund isn’t inconsequential, it represents only a sliver of the $1.4 billion Vermont spends annually on public education.
He said the union is committed to working with lawmakers and the administration to find a solution, but that retroactive changes to the benefits plans of retirees won’t be part of the mix.
“This isn’t Wisconsin, fortunately,” Allen said. “Everyone involved is trying to figure out how do we keep the promises we’ve made, rather than how do we change the benefit mix.”
That doesn’t mean Pearce and other elected officials, however, won’t seek increased contributions from teachers to close the $20 million shortfall. Allen said any compromise needs to be mindful of the concessions teachers made in a 2010 pension reform package that helped shave tens of millions of dollars from future obligations.
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