Retiree Health Benefit Agreement Reached
Vermont-NEA has reached an agreement with the treasurer, governor and legislative leaders to provide for the first time an independent funding source for the Vermont State Teachers’ Retirement System’s health benefits. This agreement was necessary for two reasons: to secure the long-term viability of your pension fund and to ensure teachers have excellent and affordable medical benefits when they retire.
The lion’s share of the costs of retiree health benefits has been paid for by drawing money from the system’s pension fund. The balance comes from the pockets of retirees themselves.
The first part of this arrangement is highly problematic, because a pension fund is designed and managed exclusively to pay pension obligations, not health benefits. When you redirect money—a lot of money, $20 million annually at present and rising—from the pension fund to pay for health benefits, you erode the fiscal strength and stability of the fund, and this, ultimately, could lead to its demise.
The funding problem, of course, grows more severe when you factor in the rising number of teacher retirees (from under 4,000 in 2001 to over 7,300 today, two-thirds of whom take the health benefit) and the advent of subsidized spousal coverage.
Essentially, the bottom line is this: by paying for retiree health benefits with money earmarked specifically for pensions, the system could reach a point where it did not have enough assets to meet its pension obligations in the future.
The system’s actuaries have been advising the state to find a way to pay for retiree health benefits costs in a fashion that removes the burden from the pension fund. The new agreement does this, and, thankfully, does not result in a reduction in benefits. It’s also a compromise that does not fall on the backs of teachers alone, but requires three groups to pay for the health benefit going forward as follows.
First, the overwhelming portion – more than 75 percent of the $20 million-a-year obligation – will come from the state.
Second, teachers who have less than five years of service as of July 1 will be asked to contribute an increase of 1 percentage point in their pension payments. This means their total contribution to the retirement system will rise from 5 percent of salary to 6 percent. This extends to all who become teachers after that date. Teachers who are vested in the retirement system on July 1, 2014—that is, those with five or more years of retirement service credit—will continue to pay 5 percent.
Finally, school districts will be called on to make annual payments of about $1,000 for every teacher they hire who is new to the retirement system, again, starting July 1, 2014. [See the FAQ for more details on the funding compromise.]
We know that some of you will no doubt have questions, and some of you may be upset with having to pay more for your pension and retiree health benefit, just four years after you and your colleagues were asked to increase your contribution toward your pension. Your union tried mightily to insulate you and your colleagues from a further increase in what you contribute to your pension, but without this compromise, no agreement would have been reached.
But, again, doing nothing was not – is not – an option.
If this compromise had not been reached, we were facing the real possibility that your pension fund – particularly for teachers retiring decades from now – could become financially unsustainable. This, inevitably, would have led to calls to reduce your pension or medical benefits, or both, and, perhaps, to eliminate the retiree health benefit altogether and replace the pension with a risky, 401K-style, defined contribution plan.
Fortunately, this agreement puts the retirement system on a sound financial course for decades to come, so that it is able to deliver both the pension and medical benefits you’ve earned. It allows current teachers – and teachers yet to be hired – to count on a promise that stretches back more than half a century.
We are lucky here in Vermont. Elsewhere in the country, public pensions are under attack by politicians of both parties. Here, our elected leaders are starting from the position of wanting to preserve the pension and its retiree health benefits.
We have great hope that a transition to Green Mountain Care – a publicly funded, universally available, portable and comprehensive health plan – will make these types of situations a thing of the past. Indeed, if Vermont is successful in implementing Green Mountain Care, then health care will truly, finally, be divorced from employment and the costs of all retirees will be shared more equitably across the population.
But, for now, the state, Vermont-NEA and school districts had to compromise and make sacrifices to preserve your pension and retiree health benefits.