Dangerous Trends
and the Need for Action
Presented by David R. Coates, Member
Vermont Business Roundtable
“Just the Messenger”
2
Vermont’s Debt Picture
Outstanding General Obligation Debt
6/30/08
6/30/09
6/30/10
$438,582,000
440,633,000
479,896,000
Debt Service Payments (Interest & Principal)
6/30/08
6/30/09
6/30/10
$ 69,419,000
70,459,000
70,747,000
New Debt Authorization by Fiscal Year
2007
2008
2009
2010
2011
$ 45,000,000
49,200,000
64,650,000
69,960,000
71,825,000
Source: Office of Vermont State Treasurer
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Other Debt Related Information
Net tax supported debt as percentage of gross state domestic product
2009
2010
Vermont
1.75%
1.73%
Highest
MA 7.98%
MA 8.32%
Net tax supported debt per capita
2008
2009
2010
$707
692
772
CT $4,859
Net tax supported debt as percent of personal income
2008
2009
2010
1.8%
1.8%
2.0%
Hawaii 9.9%
Net tax supported debt service as percent of revenues
2009
2010
2020
Actual
5.5%
5.7%
4.3%
Guideline
6%
6%
6%
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Other Debt Related Information
How is Vermont’s Debt Rated?
FITCH
AAA
MOODY’S
AAA
S&P
AA+
Highest in New England
How is Vermont’s Debt Managed?
Capital Debt Affordability Advisory Committee
Guidelines of AAA Rated States
Debt Per Capita
Debt as a Percent of Personal Income
Level Principal Payments (80% paid in 10 years)
State Moral Obligation Indebtedness
Improved rating lowers interest rate for other Vermont borrowers
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Department of Buildings & Grounds (BGS)
Estimated Capital Costs for Fiscal Years 2010 - 2016
(Largest Items)
Information Systems
150 M
Health Laboratory
25 M
State Hospital
80 M
State Buildings, Parks and Colleges
200 M
State Correctional Expansion
100 M
Pollution Control / Drinking Water
100 M
TOTAL
650 M +
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Retirement Plans
Three Major Plans
— “State Employees” – Vermont State Retirement System (VSRS)
— “Teachers” – State Teachers’ Retirement System (STRS)
— Municipal Employees Retirement System (MERS)
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Pensions
State Employees
6/30/09
6/30/08
Active Members
8,095
8,442
Covered Payroll
$404,516,000
$404,938,000
Average Wage
$49,971
$47,967
Employee Contribution
3.35% *
3.35%
6/30/09
6/30/08
Active Members
10,799
10,685
Covered Payroll
$561,588,000
$535,807,000
Average Wage
$52,004
$50,146
Employee Contribution
3.54%
3.54%
Teachers
* Employees hired after 7/1/08 pay 5.1%
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Pensions
Unfunded Liabilities as Determined by Actuary
6/30/09
6/30/08
State
$326.5 M
87.1 M
Teachers *
$727.8 M
379.5 M
Total
$1,054.3 M
466.6 M
Increase
$239.4 M
$348.3 M
$ 587.7 M
Annual Required Contributions (ARC) as Determined by Actuary
6/30/10
6/30/11
6/30/12
State
$39.7 M
41.6 M
43.5 M
Teachers *
$60.6 M
63.5 M
66.5 M
Total
$100.3 M
105.1 M
110.0 M
Percent Plans are Funded
6/30/08
6/30/09
State
94.1%
78.9%
Teachers
80.9%
65.4%
* Before impact of H 764
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Other Post Employment Benefits (OPEB)
Unfunded Liabilities as Determined by Actuary
State
Teachers
Total
6/30/09
$775.0 M
$872.2 M
$1,647.2 M
6/30/08
751.0 M
863.6 M
1,614.6 M
Increase
$ 24.0 M
$
8.6 M
$
32.6 M
State and Teachers are on “pay as you go system”
Teachers:
2011
2020
ARC1
$62.1 M
98.1 M
State:
2011
2020
$61.0 M
95.3 M
1
“Pay As You Go”
$19.9M
38.3 M
$28.0 M
46.5 M
Annual Required Contributions as Determined by Actuary
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Combined Unfunded Liabilities
for Pension and OPEB
State
$ 326.5 M
775.0 M
Teachers
$ 727.8 M
872.2 M
Total
$1,054.3 M
1,647.2 M
Totals 2009
$1,101.5 M
$1,600.0 M
$2,701.5 M
Totals 2008
$
838.1 M
$1,243.1 M
$2,081.2 M
Increase
$
263.4 M
$ 356.9 M
$ 620.3 M
Pension
OPEB
2009 Impact based on Benefits Already Earned (Rounded)
Per Working Vermonter
$ 4,000
$ 5,000
$ 9,000
Per Capita
$ 2,000
$ 3,000
$ 5,000
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Impact of H 764
(Changes to Teachers Pension and OPEB)
6/30/09
Per Actuary Report
Estimated Impact
Pension
$727.8 M
$679.3 M
OPEB
$872.2 M
$829.1 M
Annual Required Contribution (Pension)
As of 6/30/09 Valuation - 2011
Revised Per H764 - 2011
Savings for 2011
$63.5 M
48.2 M
15.3 M
Estimated Savings from 2011 – 2020
188.0 M
OPEB
ARC
“Pay As You Go”
As of 6/30/09 Valuation
Revised Per H 764 - 2011
Savings for 2011
$ 62.1 M
46.9 M
15.2 M
$19.9
19.9
~
Estimated Savings from 2011 – 2020
$374.9 M
$32.2 M
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Report of the Commission on the Design and Funding of
Retirement and Retiree Health Benefit Plans for State
Employees and Teachers
(The Retirement Commission)
Key Findings –
These costs are growing much faster than state revenues
State’s combined contribution for just pensions represented 5% of G.F. revenue in 2008. In 2011
it is projected to be 7%
The Joint Fiscal Committee’s pension growth target is 3½% per year
Investment returns will not get the state out of this problem
The state has not been able to prefund for OPEB
The Annual Required Contribution (ARC) has been increasing at an unsustainable pace, even
before consideration of current economic events
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Report of the Commission on the Design and Funding of
Retirement and Retiree Health Benefit Plans for State
Employees and Teachers
(The Retirement Commission)
Key Recommendations


No change to persons already retired or person
within 5 years of retirement

Do not replace defined benefit plan and
transition to a defined contribution plan

Fully fund ARC for pensions

Implement a plan to fully fund OPEB
obligations

Revise normal and early retirement dates

Raise normal retirement age to 65 from
62 (or rule of 90)

Raise early retirement age from 55 to 58

Lengthen salary compensation period – use 5
years instead of 3 years

Increase maximum benefit from 50% to 60% of
final compensation




Revise contribution rate for employees
beginning in fiscal year 2011
 State workers – from 5.10% to 5.83%
(Group F)
 Teachers – from 3.40% to 5.47%
(Group C)
Cap state share of annual pension
contribution at 3.5% - share in anything
over/under
Tiered medical premiums co-payment
structure
40% - 10 years
60% - 20 years
80% - 30 years
Provide ability to “recapture” the retiree health
benefit
Do not use pension obligation bonds to fund
pension obligations
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Other Thoughts and
Observations …
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