Vermont Legislature SmartTranscripts:

[Sen. Ann Cummings (Chair)]: Forgetting that. We are a lot. This is senate finance, and we are what we today, it's come up about the cost of teacher pensions that is included in the Ed Fund, and it's been suggested that it might be removed. So you are our pension person. I think that's not what you came here to do, but you inherited it. Thought we'd give you a chance to talk a little bit about

[Sen. Thomas Chittenden (Vice Chair)]: It's being presented as a

[Sen. Ann Cummings (Chair)]: bill or how is it being presented to us? Just as information. Just a sec.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Well, good afternoon, senators. For the record, Christopher from the going to the school office. I'm just joining here so I can share my screen. So I am very excited to talk about teacher retirement with you all for the next four hours. I those of you who have been around for a little bit and have heard me drone on about this topic know that I can build a space. I actually think it's kinda fun, but I really only in in all serious ness, I'm here for fifteen minutes or so to walk through at a very high level, very focused, what is being paid out of the Ed Fund in those two lines that we see in the Ed Fund outlook, and what's being paid from the general fund, and how things have looked over the last couple years, and I wanna have some time for questions. I also am delighted to have run into my colleague, Tim Duggan from the retirement office over at the treasurer's office. We were across the hall earlier and I said, hey, why don't you come by and hang out while I talk about So usually when either of us are talking about retirement, the other one is in the audience because it's just it's fun to sort of tag team. And if you have any really specific questions that I can't answer, especially about, like, operations, I'm gonna look to Tim and throw you under the bus. So you guys know this. So, you know, I really wanted to talk about just a few things about those two lines on the Ed Fund outlook. You know, how does Vermont fund public school retirement benefits? What are those costs that are paid out of the Ed Fund and how have they trended in recent years? In advance of this, I sent you all an email with a few resources that I do not wanna spend time going through, but if you wanna drill down in on your own time and really get into the weeds, you can do so. One of those is the issue brief I wrote last year on this question, thinking you all might be interested in hearing about it. And the latest actuarial valuations for the pension and OHEB systems for the teachers that really, you know, let you look under the hood and see how the numbers are moving and why. But for today, I'm really gonna talk about what goes on in those lines that the red arrows are pointing to. So Vermont funds the employer share of retirement benefits for teachers, mostly through the state budget, not at the school district level. The pension benefits for non teaching school staff, however, those who are not in the teacher system, in visitors, they are funded at the school level. There are some limited exceptions to this rule. The schools that have federally funded teachers, they pay the pension costs through a federal grants assessment off of the federal grants that pay for those teachers. That's about $8,000,000 in the upcoming budget year. And on the OPEB front, teachers will make a contribution that's called a new teacher assessment for teachers first hired after 07/01/2015. And that new teacher assessment, it's adjusted for inflation every year. It's about $16.49 dollars per teacher upcoming, and it brings in about 9,000,000. So the money that comes in from those two exceptions offsets the costs that would otherwise fall to the Ed Fund and the General Fund. So, we're gonna talk specifically about teachers and then talk about non teachers. This is not a pension 101, you all have heard me do that, but I just wanna remind you all that when we're talking about these retirement systems, essentially it's a way of pre funding benefits. So, you as the active teacher and the employer of the state make contributions toward your future benefits throughout the course of your career. That money that you contribute then gets invested over the long haul and then funds the cost of the benefits once you're in retirement. So by pre funding these benefits, it's how you harness investment gains to pay for these costs, so the costs aren't fully borne by future taxpayers. And nationwide, when you look at major retirement systems, over 60% of the costs of these benefits come from investment gains, not from contributions. So it's not unlike your personal IRA, where you make contributions over the course of your working career, you invest those and then you have a nest egg. The employee contributions that active teachers make, they go toward what's called the normal cost. That's the cost of the benefits that are being accrued to the system every year people are working. But those contributions do not fully fund the normal cost. The rest of that normal cost gets picked up through the employer. The normal cost is based on the characteristics of the workforce, the demographics of the workforce, and the actuarial assumptions you have in place at the time. Just for, you know, these are really big dollar figures. It's interesting to look at them in dollar figures, but it's also really useful to look at them as a percentage of payroll. Cause that's how you sort of sort out and control for the different sizes of governments, like what does a pension benefit really mean? And the normal cost is a useful proxy for people like me, sort of compare how expensive different plans are based on different assumptions. So the normal cost for the teacher system is 11.83% of payroll. Overall, about 6.82% of that comes from teacher contributions. And then the rest of that is made up for with a payment from the state, which is about 5% of payroll. This also includes an assumption around admin costs.

[Sen. Ann Cummings (Chair)]: Yeah. The state general fund or ed fund?

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: So the normal cost, you're just gonna skip ahead. The normal cost hits the Ed fund. Yes. The unfunded liability payment hits the general fund. So the second piece here talks about the unfunded liability. So

[Sen. Ann Cummings (Chair)]: the general fund, I assume, would pay the normal cost for state employees if you

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: The state employees are funded totally differently. They're actually funded through a rate that's assessed on payroll, and that rate includes both the normal cost and the unfunded liability, and it hits the funds that employ the active members. So if you're, you know, roughly 40% of that cost is the general fund, the rest of it goes to federal funds, special funds, wherever the payroll cost centers are in state governments. Going back to the teachers though, the unfunded liability piece, you know, that represents the shortfall, the risk, if you will, where things might not pan out according to assumptions. You might have high inflation or a rough investment year. Sometimes your assumptions change as the role changes and expectations of the role change. And that piece, you could also have legacy underfunding, which happened in the teacher system pre 2007. So all of that gets reflected in this big chunky number called the unfunded liability. And I sort of think of that as a debt that has to be paid back to the system with interest by a period of time. And by statute, that payment, those payments have to be made by 2038, by which point the system would theoretically be fully funded. And statute calculates the payments to grow in 3% year over year increments. So if you see costs went up over last year, it's like, well, yeah, if everything worked out exactly the way you thought they would, the costs would go up every year. So that's why it's important to control for a percentage of payroll, because our actuarial system is designed so those payments escalate roughly parallel to what you think payroll is gonna go up to over time. One other thing I really wanna mention is, I think most of you were in the legislature in 2022, with maybe one exception, when Act 114 passed. Part of Act 114, which was a big pension reform effort, the state had committed to making additional payments every year. They call those the plus payments that go toward accelerating the paid out of the unfunded liabilities. And they're currently at 15,000,000 a year for the teacher system and then another 15 for the state system. And that sort of functions like making an extra mortgage payment every year, where you're accelerating the pay down of the principal. And the effect of that is you're saving taxpayer costs over time, and you're also lowering the rate of growth in future ADAC payments below that 3% rate. So in a way, if you pay a little bit more now, you're buying yourselves future budget capacity by sort of bringing down that rate of growth in future years. Another really important thing that Act one fourteen did was it prefunded OPEB, which I'm gonna get to in a little bit. And there was also a commitment from active teachers to make higher contribution rates. As, and I'm gonna get to a figure that shows the impact of that. But over a three year phased in period, there were higher contribution rates phased in. And as a result, active teachers are bearing a larger share of the total normal cost than they would have had there been no changes to those rates.

[Sen. Ann Cummings (Chair)]: My understanding is before we did that, they were just paying the costs out of the body of

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: For OPAP. Yeah.

[Sen. Ann Cummings (Chair)]: The OPAP. It was not capitalized like the pensions are. It wasn't

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah. It's good to go.

[Sen. Ann Cummings (Chair)]: Yeah. Was good to pay as you go.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah. So on the theme of trying to give you all uplifting news, I'm gonna talk a little bit about how things didn't work that great in the past, and then talk about, like, the wonderful things you all did recently to try to get the systems on a slightly But better footing moving the I think we already mentioned a lot of this that, you know, going back to the in fund outlook, what you see on that outlook on those two lines represents that net employer normal cost. It gets paid off the top. It is not reflected in local school budgets. The unfunded liability on the other hand is paid primarily from the general fund. If you go in the big bill every year in the b five hundred secondtions, you'll actually see these appropriations going straight into the teacher retirement system. There was legacy underfunding in prior decades in the pension system, but it's important to remember that the in our current closed amortization period, thirty years ran from FY o nine, ends in FY '38, the state has fully funded the ADAC every year. And if the ADAC is not fully funded in one year, that shortfall doesn't just disappear. You have to make up for it in higher future ADAC payments. So the math self corrects, but to the detriment of the state, because if you're paying it on the unfunded liability, losing the ability to earn interest in the investment market and you have to make up for that lost opportunity. So it's really important to put the right amount in on the front end.

[Sen. Ann Cummings (Chair)]: Okay. During that legacy underfunding, did that mean that the boots on the ground, the state employees, the teachers were paying less because there was less going in?

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: No. The the employees made their contributions. Was the state that was The not employer. It was the employer that was not fully funding the ADAG. And like I said, that that is That's not real savings when you do that. It pushes the balloon and all your future costs end up going up to make

[Sen. Ann Cummings (Chair)]: us And the employer was essentially the Ed fund.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Back then it was the general fund.

[Sen. Ann Cummings (Chair)]: Oh, okay. It was in the 90s. That's right.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah, this, I'm talking 1979 to like 2007. Yeah. The fact that there was underfunding that happened back then is one reason why the teacher retirement system is a little bit worse off than the state employee system, in that it's funded ratio is lower. But the vast majority of how we got to where we are with the teacher retirement system is not due to that. It's due to things that have happened since 2009, namely the great recession, a huge demographic wave of retirements that made it hard to dig ourselves out of the impacts of the great recession, and actuarial assumptions have been changed. And we're not unique in that respect. A lot of states have lowered their assumptions downward, their assumed rate of returns downward rather. And in It took effect in FY 'twenty two, but it'll be the year where you see costs really jump up on a future slide. That was due to the systems lowering the assumed rate of return from 7.5 to 7%. And that had a pretty significant increase on the normal cost and the unfunded liability. We are in line with most large state retirement systems at being at 7%, but it's really important to have accurate and realistic assumptions. The rule changes, your assumptions need to change with it. So that's sort of my way of saying that sometimes when something happens that causes the unfunded liability to go up, it's not due to like nefarious reasons or bad things. Sometimes it's due to responsible fiscal management leading you to revise your assumptions. And I just wanna flag that the systems are already up for their next round of experience studies later this year. They're done on a three year basis. And that's when the actuaries look at the assumptions and advise as to whether or not there's any true ups needed moving forward. So here's a little bit of history of the recent funding of the teacher pension system. And I tried to fit way too much information on way too few slides, but the sort of peach color in the bars there correspond to the normal cost that was picked up by the Ed Fund. You can see that in FY twenty one, that was a little less than 7,000,000. I believe the Ed Fund first started picking up the pension normal cost around FY eighteen, and it had been around that $7,000,000 level up until 'twenty two. And in 'twenty two, you see that big jump because that's when the assumptions change. And moving forward a few more years, normally under a blue sky, you would expect costs to go up 3% a year as payroll grows, with all else being equal. If you look at from '22, '23, 2425, the normal cost number hitting the Ed Fund did not go up by 3% a year. It sort of flattened a little bit. That is the impact of the higher teacher contributions being phased in as a result of Act one fourteen. And then moving forward, the budget that is currently before you contemplates a normal cost of 42,160,000.00 heading for the the Ed Fund. The unfunded liability, however, that hits the general fund is much, much larger than what the Ed fund is picking up to pay the normal cost. I have different shades of blue to show you the impacts of what is being picked up on the general fund, but that $170,750,000 that's just the ADAC piece of the unfunded liability payment. There's also that $15,000,000 plus payment being tacked on top of that. And that little greenish segment at the very top, that 8,000,000, that represents the money that would come in from the federal grants assessment for the federally funded teachers. So my point with all of this is that these are pretty significant expenses, $236,000,000 in FY27 across all funds, but the vast majority of that is picked up on the general fund. You just heard me blather about the utility of looking at this as a percentage of pay to sort of control for growth in the workforce. Whenever you look at it that way, you see that costs have actually stabilized quite a bit in recent years after that first big jump in FY22 when the assumptions were revised. I already mentioned that the active teachers are paying higher contributions than they were before. So you saw the employee E normal cost, that blue segment, grow a little bit over time. So now it's at 6.82% of projected payroll for FY 'twenty seven. You've also seen the piece that hits the ed fund, that orange segment, stabilize a little bit right around 5% with some noise from year to year. But overall, the cost has started to come down as a percentage of pay on the pension side, which means our year over year growth in the ADAC has become a lot more manageable from a budgetary perspective. This just shows you sort of the top lines of where the system is. That solid black line at the top shows you the accrued liabilities, that's how much the systems owe, so just under 4,800,000,000.0. The dotted line shows the actuarial value of assets, so we have just over $3,000,000,000 on hand, So that results in a shortfall and unfunded liability of about 1,750,000,000.00. This is significantly lower than it was just a few years ago. I've sort of glossed over, unfortunately, the fact that as part of one as at 01/14, you all also made $200,000,000 of one time general fund payments toward the pension systems. 75,000,000 went to the state. 125,000,000 went to the teachers. So that really took a bite out of the principle of the unfunded liability in the last couple years and helped put that downward pressure on the general fund moving forward. And from bottoming out at a low of 51.3% funded, whenever the pension reform discussion really got started a few years ago, the systems have made steady progress in the years since, and now they're up to 63.4% funded. So, are there any questions on pensions before I move on?

[Sen. Thomas Chittenden (Vice Chair)]: Just to make me feel better so we can keep it up. That 60% or current funded ratio of 63.4, any reflections on how that compares to other statewide pensions in other states? I think it's not as bad.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: It could be worse and it could be a heck of a lot better. 63.4% is not great. I look at this as one data point. I think it's really important to look at the trend over time. Are you getting better or worse over time and what's causing it? You know, a lot of systems are in the 70s and 80s. Some are better funded and are fully funded or in the 90s. There are some states out there that I'm not gonna mention that are in really, really bad shape. I think the important thing is you want to be making progress toward getting to 100% funded. You need to be able to afford that progress and it needs to be sustainable from a budgetary standpoint. And you need to make sure you don't run the risk of hitting what's called a crossover event, which I'm not gonna get into, because that's really actuarial weeds. But want you it to be getting better over time. 63.4%, I think is still cause for concern, but the fact that we've seen steady progress is encouragement. Our actuarial Like the way we do our amortization with those 3% growth payments means that most of the progress at chipping away happens in the latter years of that thirty year period. So we're like at the point where only for the last few years have we really been chipping away in the principal. As we get closer to 2038, you're gonna see progress accelerate at paying down on that unfunded liability.

[Sen. Thomas Chittenden (Vice Chair)]: I like the caps and insurance even better.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Things are going the right direction.

[Sen. Ann Cummings (Chair)]: Private sector, because it's been pointed out by more than one administration to us, this is a defined benefit. You get x. Most of the private world, I think, has gone to a defined investment. They will contribute to your IRA. And if the market crashes the day you retire No. That's your outlook. It relieves the employer, and in this case, the state is the employer. It relieves the employer of all of this responsibility. If the market crashes, the market crashes. If it goes up, it goes up.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah. What you're referring to, senator, is, you know, the the DC, a defined contribution, doesn't have the potential of incurring an unfunded liability because the unfunded liability that that risk would not be borne by the employer. I'd also mention that a lot of states have had different plans in the last fifteen years or so. Some have gone to different plans for new hires. Have not done that. Yeah. We have not done that in Vermont. Even if a decision were made to do that or to even end this program tomorrow, it doesn't make this problem go away because this is about service that's already been rendered or earned, not service in the future. So regardless, you could end retirement security tomorrow and still have this fiscal problem to deal with. So, I'll pivot over to OPEB. Whenever you hear people say OPEB, that's a long way of saying retiree healthcare benefits. We provide a subsidized health insurance benefit to retired state employees and teachers. OPEB stands for other post employment benefits. As part of Act 114, the state began pre funding OPEB and the system mirrors how we're doing it with pensions, where the normal cost is being paid out of the Ed Fund and the unfunded liability costs are paid from the general fund. The reason, the thinking behind why should the normal cost be paid out of the Ed fund is that a normal cost represents a cost of compensating today's workers in the future. So it is very similar to salary and other benefits, where this is money that you're setting aside as somebody is providing service today as part of their compensation package being offered today so that they have money later on. There's also that new teacher assessment in the OPEB space that I talked about that picks up some of that cost, about $9,000,000 that would otherwise fall to the two other funds of state government. Active teachers, unlike with pensions, active teachers don't make a contribution toward OPEB, instead they pay a share of the premium when they're retired and enrolled in benefits. So there is an employee cost share, it

[Sen. Ann Cummings (Chair)]: just shows up differently. So when you retire, if you retire before 65, this would provide you health care. Yeah. When you turn 65, 70, whenever you go on to Medicare, does this transfer into buying Medicare?

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: It does interact with Medicare, yeah. I also wanted to just mention that the amount of the benefit is tiered based on your years of service. So it's not like the pension system where there's sort of a straight up formula that counts like your average final compensation and a multiplier and your years of service. Here, it's based on, you pay a percentage of your premium based on how many years you served as a teacher. So the more years you served, the less you pay toward the cost. As was mentioned here prior to 2023, OPEB was just funded on a pay as you go basis. There was really minimal pre funding. So the state was just paying the current year's budget costs for providing benefits for the upcoming year. And that came at a lower cost to the budget every year, but in the big picture, that comes at a much higher cost to the taxpayer, because you don't have that ability to invest money and have compound interest gains paying for a majority of the cost of this benefit in a few decades. And you go even further back, pre-twenty fifteen, as you mentioned, these costs were coming out of the importance of the teacher retirement system. So that has the same actuarial effect as shorting the ADEC. I mean, you're offering this benefit, it represents a cost. You need to properly fund that cost a fiscally prudent manner. And regardless of what the details look like, pre funding and being able to take advantage of investment gains is the fiscally prudent way of managing these long term liabilities. OPEB, I mentioned pensions are supposed to be fully funded by 2038, OPEB will be 2048. So we've got a little bit longer. We're at the very beginning of that journey. So here's the numbers that just show you in recent years, who's picked up what. There's been some one time things that have happened in the OPEB space to get things going in FY '22, and there was some surplus of the Ed Fund that year from higher than expected sales tax revenue that was used to get this going to provide for a little bit of cushion against any, like, immediate term volatility for starting the prefunding. Then when we first got going in '23, the Ed Fund was picking up the normal cost of $15,100,000 That has since grown to $28,200,000 The General Fund has picked up the unfunded liability piece, and that has grown from 35,000,000 to 62,600,000.0. This is a less encouraging story, less positive story than on the pension front, where we saw pretty reasonable year over year changes on the pension front, we're seeing pretty sizable jumps in OPEB. And that should come as no surprise to this committee. What you're seeing with healthcare cost trends in the broader world trickle into the OPEB space. There were healthcare cost trends that were revised upward pretty much every year for recent years that have led this cost to grow quite a bit. And this actually would have been much, much worse this year had the treasurer's office not taken some pretty significant steps to renegotiate their healthcare provider and find a lower cost provider. Because just to put a little plug in my colleague, Tim, sitting in the cheap seats over there, they were faced with almost 50% proposed increase from their provider. And they went out with an RFP and secured coverage for a much, much lower rate of increase that was closer to what, 16%. So that avoided increasing the unfunded liability by over $200,000,000 and it would have put over $20,000,000 of extra pressure on the ADAC. So, it's kind of sad when you celebrate double digit increases, but like 16% is way more reason to celebrate than 50. Five zero.

[Sen. Ann Cummings (Chair)]: Yeah. Would have been paid.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: This again just shows you as a percentage of payroll. Yeah, not only have the cost in dollar terms gone up, but as a percentage of pay, OPEB has gone up. Again, this

[Sen. Ann Cummings (Chair)]: is So as in everyone's health insurance.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah, it's tricky. And this will show you a similar big picture, where are we with the systems? The old gov systems, like I said, we've only been pre funding for a few years. So we're only at 13.6% funded, but we are at zero, not that long. We have a long way to go to get to a 100, but you will see that there's a pretty sizable unfunded liability of over $1,000,000,000 in teacher healthcare benefits. And that would have been much, much worse had you all not prefunded. That big dip that I pointed the arrow to in '22, when you saw the net OPEB liabilities drop that much, that was due solely to the adoption of a prefunding policy. Because the accounting rules let you discount your liabilities by 7% If you're setting aside money and actually investing it, and can reasonably expect to get that kind of return. When we were in PAYGO, we couldn't use the 7% rate of return. We had to use a rate of return that was tied to like the twenty year AA municipal bond rate, which was around 2% of the time. So, just by shifting to a pre funding system, the math allows you adopt a higher discount rate that really cleaned up the state's balance sheet. So I've been talking about teachers up to this point. What about the non teaching staff who work in schools? Many of them participate in the muni system, the MERS, or in some other local retirement system that their city might offer. These, unlike the teachers, which are paid off the top, the retirement benefits for the non teaching school staff are reflected in local school budgets. So the VMERS system, which I'm not gonna spend a lot of time on today, is very different than the teachers and the state employees. VMERS is fully funded by the participating municipalities and employees. So you're not gonna see a line item in the state budget of, like, pumping money into VMERS to help them meet their ADEC. The employees and the employers instead, they pay a percentage of payroll. And it varies based on the four benefit groups, but you all have actually enacted a series of 25 basis point increases in the contribution rates that will run through FY 2030, phased in through FY 2030, because VMERS has been struggling to beat their ADAC. The amount of money that the stated rates have been generating isn't raising enough to fully fund the ADAC. So the systems have been hovering in the mid to high 70% funded. So the retirement boards have had a focus on trying to not backslide in that by increasing the contribution rates. So it's a very, very different system, but that is the retirement costs that you see showing up in local school budgets will be for whatever benefit they offer to the non teaching staff. In conclusion, I think the top lines here are the normal cost is funded out of the end line. It's a part of compensating today's workforce. The unfunded liability payments come out of the general fund, And in effect, the general fund is bearing the risk of offering those benefits. There are those offsets from the federal funds in the new teacher assessment. And I put a little chart here that's kind of rolls up across all the funding sources, what this looks like for the FY '27 budget for the state, just for the teacher benefits. So you'll see that the Ed Fund overall, just over $70,000,000 will be going to these two uses. You see that on that Ed Fund outlook. The general fund, on the other hand, is picking up just shy of a quarter of $1,000,000,000. That is about 10% of the general fund. Just for teachers. For teachers. Just for teachers. General fund revenues are around $2,500,000,000 a year for some context. So it's a very sizable portion of the general fund going to dealing with these long term retirement liabilities just for teachers. Total across all the funding sources, period, and 35.749. Any questions?

[Sen. Ann Cummings (Chair)]: Nothing. But I think that's helpful.

[Sen. Thomas Chittenden (Vice Chair)]: So in your last slide, the general fund bears the risk of risk.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: They

[Sen. Thomas Chittenden (Vice Chair)]: also benefit if markets outfitted. That's where defined pension, defined benefits, the risk and the reward is held by the employer as by contribution, the risk is shifted to the employee, but they also get the reward if markets outperform. Have we seen with that 7% over the last two or three years, a higher market rate of return that

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: we've We have. In the last three years, actual investment performance has exceeded the 7% rate of return. And we don't recognize gains and losses immediately on the pension front. We smooth them over a five year period because you might have a year that has a 20% up and then a 10% down. And like, how do you budget with that kind of volatility? So, it's very, very common for retirement systems. We do it. It is a common method of smoothing the gains and losses over a five year period. We had a really rough investment year a few years ago. I think it was '22. That caused some deferred losses that the last three strong years have now smoothed out those losses and we will have a deferred gain moving forward. So that acts as a little bit of a tailwind moving forward. The investment losses are one side. Another thing that you need to look at, or gains and losses are one thing. A lot of times we just look at that. We need to look at everything else too. And like inflation being really high in the last two years has caused losses because COLAs have been higher than assumed. And it's caused salary group rates to be higher than assumed. So you might have a gain on one side from like having a great streak on Wall Street, but that gain might be offset from actuarial losses in other fronts. You could have experience, people retiring and net turnover behavior differing from what you thought. So all of those gains and losses get added up every year and netted out in the actuarial valuation. But yeah, it is a good point. And you don't wanna have an assumption that is so overly conservative that you're sort of overfunding the system every year because you all know how many other competing needs there are for your scarce tax dollars, but you also don't wanna have such an optimistic scenario that you're never gonna reach it because you're just, you're not putting enough money in when you're supposed to be. So it's all about being as reasonable and realistic and regularly truing up those assumptions.

[Sen. Ann Cummings (Chair)]: I think that being overly optimistic is how we got into this mess.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: A lot of places have gotten into this, gotten into a similar situation from doing that. Yeah.

[Sen. Ruth Hardy (Member)]: It delayed a steer. I would just say that maybe this isn't as rosy as the captains coming in and, you know, being like, oh, we love you. But, but, yeah, but I also do think, and thank you, Chris, this is a really helpful update, that it is great to see that trend. I mean, that's what we worked really, really hard for four years ago and had a unanimous vote in the legislature. Twice. Twice. But it was a painful It was painful, but it was, like, something we had to do, and it's really good to see that it's it's being effective. And and we have to remember that and also not believe the hype differently because there are and I think your your points about inflation and, you know, wage growth and turnover, especially with this sort of rocky world that we're in, are really good points too and how they impact what's happening.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah, and it's one of those things where like, and Pierce would always talk about early retirement incentives can have a perverse impact by shifting costs off of state budgets and onto the pension system. I think making sure that employee behavior across the system roughly mirrors how you assume it will be across the system is important. Yeah. If there's certain segments of the active population are targeted for whatever, it's a change behavior in a strange way that the actuaries aren't estimating, that can cause adverse consequences. Yeah. When is the three year check on the assumptions due this year? They're doing it this year.

[Sen. Thomas Chittenden (Vice Chair)]: Like when will we see it,

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: like in the fall or November, fall or probably.

[Sen. Thomas Chittenden (Vice Chair)]: Late in late in the year.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Okay. Yeah. If the chair would indulge me, you'd phone a friend.

[Sen. Ann Cummings (Chair)]: Yes. You can phone a friend. Introduce yourself.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Is that you saying? Hi, it's Tim Douglas. I'm Executive Director of the

[Tim Duggan (Executive Director, Retirement Division, VT State Treasurer’s Office)]: Rob Retirement System in the State Treasurer's Office. We're building schedule right now. Historically, we would have it performed in by September to inform evaluations and that that whole cycle. Yeah. Trying to see if I can get it done a little bit sooner, maybe at the beginning of the summer. You you won't see it this session.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Okay. But definitely about the fall. Okay. Great. Very similar. Yeah. If I could just offer a parting comment, senator Right. Know, I think senator Hardy raised a really good point about talking about one of the difficult Memphis was a few years ago. And I think as a result of the actions of the legislature, these systems are in a much better track for having their funding shored up over the long haul. I am not here to sugarcoat what a heavy budgetary lift it is to get there, But these unfunded liabilities don't go away on their own. You know, if the ostrich strategy doesn't make it better, know, money is what makes it better. Money is what makes it go away. And when you look at how we compare to other states in terms of our long term indebtedness, our tax supported indebtedness, we are one of the highest states. We're typically like around number 10, and it's largely due to our retirement liabilities. It's not due to our bonded indebtedness. It's the fact that we have billions of dollars in unfunded retirement liabilities. So, the only way that the system, that the state really cleans up its balance sheet and improves its fiscal position, is to make meaningful progress at chipping away at these long term issues.

[Sen. Ann Cummings (Chair)]: Does this impact It is indebtedness. Does this impact our bonding limits?

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yes, it absolutely does.

[Sen. Ann Cummings (Chair)]: So the other adverse side is if you limit your ability to bond, you are in some ways also limiting your ability to bond fixed schools.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah, and the Capital Debt Affordability Advisory Committee, when they meet every year and come up with a recommendation for the state's GO bonded indebtedness limit, they take this into account because the rating agencies take it into account. And the fact that we have such a significant long term burden on the retirement front does hinder our ability to borrow on other firms. And when Act 114 passed, the rating agencies did view that as a credit positive. They cited it in some of their write ups for the state. And, you know, I think a lot of states have been struggling to figure out what to do with their OPEB benefits in the last decade or so. And And the fact that we're on track to pre fund it is huge. Other

[Sen. Ann Cummings (Chair)]: questions? Thank you. Thank you. She's done something. Well, Joe. Committee, I think I'm shelving the take your report thing, and we'll see if we can get some further instructions through Tucker exactly what these mean if they expire in 2017. And it doesn't really make any difference what we say. If somebody else says they want it, they're gonna Yeah. Keep getting.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: So Mostly for the. Yeah.

[Sen. Ann Cummings (Chair)]: I I mean, we very saw the master of reports in this community. So we will I thought it was. Well, I think it goes on. Yeah. So, okay. I think that is it for today unless somebody has something else they wanna do. If we're not gonna do the court repeal, Tomorrow we've got the school redistricting task force coming in and Julie's gonna give us an update on the Ed Fund outlook and we've got funding through shared services from campaign for Vermont. I'm still looking for hard numbers, so and then we've okay. We are then we're gonna go back on Friday and do we have a security briefing, which is non negotiable, we're gonna walk through 248A. That is one that we do need to take action on or it will end. It will sunset, I think it's July 1, but it'll sunset this summer. It's the cell tower siding bill that is a modified siding rather than going through a few It's

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: $2.15.

[Sen. Ann Cummings (Chair)]: 2,250. Are you guys

[Sen. Ruth Hardy (Member)]: all getting lots of emails about it?

[Sen. Ann Cummings (Chair)]: We will take it. We can let it die and go back to full two fifty. We can put another sunset on and keep monitoring it. Maybe we could get it up to five or we could ask for a report. We could ask for a report. And have it sent to everybody. No. And we could or we we could just authorize it and not put a sunset on it, which is what the industry would like. Mhmm. But we have those three options, but we we need to decide to do nothing or to do something because there will be consequences either way. So I think that's it. We're gonna keep trying to work through these bills, and we're gonna have to start taking them up. Captive insurance is an h bill, so we're not touching that until after crossover. But we do have a bunch up there and I'm gonna try to get through them as quickly as possible and see if we can See if we can keep getting them in. Okay. If anybody has a bill and would like to get brought up for a walk through sooner than later, let me know. Any point Alright. Okay. At the beginning of the second year of. We've got a whole bunch today. Three or four of this.

[Christopher Rupe (Senior Fiscal Analyst, Joint Fiscal Office)]: Yeah. One.

[Sen. Ann Cummings (Chair)]: Four two of them are mine. Yeah. They all have to do with ed funding. Right? So we can take a quick look, but they can all be dealt with as part of we do to