The Retirement Deal: What You Need to Know
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Why Did We Make a Deal?
As the numbers and narrative below underscore, there were many reasons, some compelling and in the public interest, others disingenuous and harmful teachers and public schools, to propose, or at least consider, systemic changes to the Vermont State Teachers’ Retirement System (VSTRS) in 2010. A recession, growing unemployment, declining tax revenues and a $150 million state deficit gave our enemies cover to attack VSTRS as fiscally unsustainable or irresponsibly generous, and it gave our friends cause for realistic concern about the ability of the state to meet the system’s annual required contributions.
After assessing the economic and political landscape in Vermont—one marred by collective hardship, an unwillingness by political leaders of any stripe to raise new revenues, salary concessions by other unions, and the growing costs of funding VSTRS over the next two decades—it was clear that changes to VSTRS were inevitable this year. It was only a question of what these system changes would be and their severity. This scenario is playing out across the country, too, as retirement systems like yours come under intense fiscal pressures as they face the consequences of lower investment returns, longer life spans of vested members, larger pension payouts, rising health care costs and past under-funding.
Here are “the numbers” in Vermont that spoke so much louder than the need and obligation to protect the people that make our public schools work:
• $150 Million State Deficit in FY 10;
• A $20 million “contribution” requested by the legislature from the state’s teachers and public school system to the budget reduction/balancing effort—everybody was expected to “tighten their belts” and to sacrifice;
• The state’s FY 11 ARC (annual required contribution) to VSTRS: $63 million; this is a $22 million increase over the FY 10 ARC ($41.5 million).
• An FY 10 $20 million dollar cost for retiree health care benefit—and no pre-funding mechanism to meet present or future costs. Retiree health care is paid for from the investment assets of the retirement system, which only exacerbates the need for additional revenue to fund pensions;
• A request from the Legislature’s Joint Fiscal Committee to the State Treasurer to contain the rise in costs to VSTRS to just 3.5% this year—a thoroughly unrealistic demand.
The Special Commission’s VSTRS Recommendations
Before we entered into formal negotiations with the State Treasurer and the Legislature, the only recommendations under consideration about the future of VSTRS were those generated by a legislatively appointed Special Commission, which issued its official report in January. Vermont-NEA and the Vermont State Employees’ Association were excluded from this Commission by design. The Commission’s report, in its totality, constituted a grave threat to the immediate and long-term welfare of Vermont’s teachers, to public education and local school districts, and to the defined benefit structure of the retirement system.
Here are the major recommendations from the report:
• Normal eligibility for retirement increased to “Rule of 90” or age 65 for most teachers;
• Minimum 5.5% base employee contribution in FY 11 (up from base contribution of 3.54%); employee contributions would then rise annually, beginning in FY 12, based on a proportional sharing formula with the state;
• No Spousal Health Benefit and reduce health benefits for most teachers through tiering;
• Shift the cost of retiree health for new hires, effective FY 11, to local school districts;
• Change the pension calculation of AFC (average final compensation) from the 3 highest, consecutive years of earnings to the 5 highest, consecutive years of earnings, thus significantly reducing the fixed pension incomes of retirees;
• Increase AFC from 50% to 60%, but teachers must work an additional 6 years—no change in the current multiplier (1.67);
AFC x .0167 (multiplier) x Years of Service = Pension
• Raise eligibility for early retirement from 55 to 58.
• Consider changing VSTRS from a defined benefit system to defined contribution.
There was absolutely no light at the end of this tunnel. The only bright spot was the decision of the Commission not to harm the pensions and benefits of current retirees. The message to Vermont’s active teachers was harsh and unequivocal:
Work Longer, Pay More, Get Less!
Vermont-NEA’s Retirement Campaign & Objectives
In the face of the attack on VSTRS, Vermont-NEA waged a spirited statewide campaign dubbed “Keep the Promise.” Several hundred members joined us in sending a collective message of outrage and opposition to the Legislature and Governor: Keep your retirement promise to Vermont’s teachers. The full story of Vermont-NEA’s Keep the Promise Campaign, and the actions and work products it generated, can be found here.
Because of our members’ activism and the state office’s diligent advocacy, Vermont-NEA was in a much stronger position when it came time to negotiate the future of VSTRS and its benefits. We also succeeded in discrediting the reputation and the work of the Special Commission. For these reasons, by early January, the Legislature and the State Treasurer were ready to engage us directly in honest, intense and good-faith negotiations. Here is what the Association set out to accomplish in those negotiations against tough odds:
• Protect current retirees from harm;
• Preserve a defined benefit retirement plan;
• Stop the State from shifting future retirement costs to local schools;
• Preserve the 3-year formula for calculating AFC;
• Increase the Average Final Compensation of as many members as possible;
• Keep early retirement eligibility at age 55;
• Keep employee contributions to VSTRS affordable and predictable;
• Set the employee contribution at a fixed percentage of salary and reject proportional sharing of annual future costs with the state;
• Keep our members from having to work significantly longer;
• Win a spousal health care benefit and protect the 80% subsidized single health care benefit of teachers already vested;
• Eliminate the annual health care cost increment;
• Establish unequivocally in statute the state’s obligation to provide a pre-determined, subsidized health care benefit to teacher retirees;
• Secure a stronger commitment from the State to fully fund VSTRS;
• Save millions of dollars to help the State balance its budget;
• Make VSTRS fiscally stronger and sustainable over the next three decades.
HERE'S WHAT WE ACHIEVED FOR YOU IN THIS DEAL
• Protect current retirees from harm – Achieved.
• Preserve a defined benefit retirement plan – Achieved.
• Stop the State from shifting future retirement costs to local schools – Achieved.
• Preserve the 3-year formula for calculating AFC – Achieved.
• Increase the pension amount from 50% to 60% of AFC – Achieved for most teachers, and up to at least 53.34% for all teachers.
• Keep early retirement eligibility at age 55 – Achieved.
• Keep employee contributions to VSTRS affordable and predictable – We believe the annual contribution increase from 3.54% to 5% meets this test, particularly in light of the Commission’s recommendation (5.5%), benefit gains and national contribution standards; we recognize, however, that an increase in retirement contributions is still a sacrifice for many teachers, particularly in these hard times.
• Set the employee contribution at a fixed percentage of salary—reject any proportional sharing of annual future costs with the state – Achieved.
• Keep our members from having to work significantly longer – Our tentative agreement exempts teachers within five years or less of normal retirement eligibility (i.e., age 62 or any age after 30 years of service) from working longer. It requires teachers with less than 25 years of service, and younger than 57, to work to the “rule of 90” or age 65 to reach normal retirement age. However, many members were already working to the rule of 90 before this change was negotiated. A teacher who works until age 58, for example—which is not uncommon—and who began her career at age 26—is already at the rule of 90 (58 years of age + 32 years of teaching = 90). A teacher who starts his career at 30 can retire with a full pension at 60. Again, this is still a concession, but we believe it is manageable and reasonable, especially in an age when people are working longer because they want or need to.
• Win a spousal health care benefit and protect the subsidized health care benefit of vested teachers– Achieved.
• Establish unequivocally in statute the state’s obligation to provide a subsidized health care benefit to teacher retirees – Achieved;
• Eliminate the annual retiree health care cost increment – Achieved.
• Secure a stronger commitment from the State to fully fund VSTRS—Achieved.
• Save millions of dollars to help the State balance its budget—Achieved ($15.2 million dollars to be exact in FY11; this savings is replicated each year going forward. The agreement is also projected to save $85 million dollars in retiree health care savings over the next 30 years;
• Make VSTRS fiscally stronger and sustainable —Achieved.