Opinion: Responsible solutions to irresponsible debt
Relatively recently, I learned that the state of Vermont (so, we taxpayers) is incurring vast and ever increasing amounts of liability for obligations the state undertook to fund retirement plans for teachers and state workers; plans that include pension and retirement healthcare benefits. As of June 30, 2017, the state owes approximately $4.5 billion to these plans, which is an increase of $900 million from just the previous fiscal year. That’s approximately $18,750 per Vermont household (based on 240,000 households). And, for a variety of complicated reasons, based on the structure of the plans, this amount will only continue to increase.
To put this amount in perspective, it is currently three times the state’s general fund revenues and seven times the state’s bonded indebtedness (our debt for typical infrastructure items like roads and bridges). All of this to provide retirement benefits for approximately 32,000 teachers and state employees.
Now, those 32,000 people are certainly entitled to their benefits, but how can anyone fathom that our small state can even remotely hope to fund these obligations, either now or when due in approximately 20 years. This rings true especially in an environment where:
1) We repeatedly have trouble balancing our current budget given the lack of economic drivers and, yet, increasing expectations and demands for government services;
2) Our taxpayer base is shrinking at a worrisome rate and there is concern that an even higher proportion of wealthy Vermont taxpayers (those that pay the most taxes) will move out of state due to the recent federal tax reform act, which no longer permits deduction of state taxes from federal income taxes; and,
3) While the state and its leaders are working hard to develop strategies and policies to make Vermont more affordable, this liability will likely, at some point, result in the state losing its Triple A bond rating, which would increase borrowing costs for the state and state-related agencies (e.g. VHFA, VSAC, VEDA), ultimately costing taxpayers millions of additional dollars.
So, what to do? Well, we can’t continue to ignore this issue and hope that it goes away (it won’t). It’s simply irresponsible to do so. Instead, let’s take concrete steps to stop the hemorrhaging.
One possibility that makes real common sense is to contain the existing liability by honoring our current obligations under the existing plans, but no longer admitting new employees. That will at least limit the future liability under these plans to the existing participants. Then, let’s establish what’s called a defined benefit plan (think 401k) for new teachers and state employees, where the state’s contribution is fixed and not open-ended like it is now. Not a perfect solution, but one that I think is fair, responsible, and at least worth exploring.
Of course, there will be costs associated with transitioning to a defined benefit plan. But, we have a tremendous opportunity right now to cover some or all of these costs, as I also recently learned that our state will receive $28 million in settlement of a number of disputes between the state and the major tobacco companies. While half of this money has already been earmarked to help address the opioid epidemic, wouldn’t it be great if we could use the remaining windfall to transition to a defined benefit plan? This would allow us to take real and meaningful steps to solve a clearly unsustainable situation.
Now, that would be responsible.
Mark Crow is the President of Tenth Crow Creative and serves on the Vermont Business Roundtable’s Board of Directors. He resides in Shelburne.
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