Guest Commentary: Guess What? Vermont Has a Negative Net Worth!

by David Coates

Just recently the State’s financial statements were published for the fiscal year ending June 30, 2018. For perhaps the first time in history, the state’s Balance Sheet shows a negative net worth of $200 million. In other words, our liabilities exceed our assets. By contrast, the fiscal year ending June 30, 2017, showed our net worth was a positive $1.3 billion, so the logical question would be, what happened to give us a variance to the tune of $1.5 billion?

The answer is really quite simple. The GASB (Government Accounting Standards Board) finally required that all unfunded liabilities (pensions and other post-retirement benefits) must be recorded on governmental financial statements. Pensions were required in prior years, but the big hit this year for Vermont was the OPEB, or commonly referred to as the retiree health care benefits for teachers and state workers. These newly recorded retiree health care benefits, which now total $2.2 billion, created the negative net worth as noted above. I have previously reported this was coming, so it shouldn’t be a complete shock for those who have been paying attention. Vermont is certainly not alone with a negative net worth. Several other states find themselves in a similar situation. But, Vermonters have always lived within their means, including balanced budgets, and somehow a negative net worth seems like a big step backwards.

Because the State is using a rate of return assumption of 7.5% on pension investments, which is not realistic given past results and current market conditions, I believe that our negative net worth of $200 million is really much larger. For 2018, S&P recorded a 6.2% decline and the Dow a decline of 5.6%. Over the last five years the actual rate of return for the pension investments was 6.3% and over ten years, 5.5%; nothing close to the assumed 7.5%. Per the Actuary, if the rate was 6.5%, it would add over $600 million to the State’s pension liability. When that happens, it will add an additional $30 million plus in required annual payments to the $205 million now due in 2020, as you will see noted below.

Another disappointment in 2018 was the forewarned loss of the State’s Triple A bond rating.  One of the factors stated by Moody’s that could lead to such a downgrade was “substantial growth in debt or unfunded post-employment liabilities.” This loss means the State will pay more interest on new bonds issued, as will other organizations that rely on the State’s bond rating.

The negative net worth and the downgrade in our ratings could both have been avoided if we had taken corrective action several years ago to make structural changes to the State’s benefit plans. The Pension Commission (of which, I was one of nine members) in its 2009 report made several recommendations to improve the pensions. A key recommendation that was passed by the Commission would have required the plan participants to share in any annual costs that exceeded 3.5% (the then Legislative Joint Fiscal Committee provided the 3.5% as the annual benchmark for retirement and health care benefit increases). When the union contracts were negotiated, this recommendation was not included.

According to the PEW Foundation, there are 29 states that have some form of cost sharing or other mechanism with plan participants, but we aren’t one of them, and the State would be in much better shape if it had cost sharing.

The unfunded liability for pensions increased by $73 million this past year and now totals $2.3 billion. The State continues to fund pensions in accordance with actuarial recommendations, which increased from $66 million in 2008 to $205 million in 2020 and continues to place great stress on our revenues and other important programs.

However, the State is NOT funding the actuarial recommendations for the retiree healthcare plans, leaving a substantial shortfall every year. In 2020, this will be around $85 million and will continue to grow unless something is done. Obviously, it is not being paid because the State does not have the resources available without raising taxes.

Finally, since 2009 the State’s population has essentially remained the same, the total workforce has decreased by around 15,000, however, the number of retired and active participants in the pension plans has increased by 17%. One must ask why we are providing benefits that we cannot afford and are not paying. Instead, we just keep running up the tab for the next generation and the one after that. 

– David Coates is KPMG Managing Partner (Retired)

{ 9 comments… read them below or add one }

Ann L Hogan March 2, 2019 at 12:55 am

This is not rocket science. David Coates is correct that we could see this coming. I salute him for making the effort to educate the public and the legislature. We need to elect courageous new legislators and leaders who are willing to deal with this financial challenge to the health of our state.


Hot Skillet March 2, 2019 at 2:45 am

Same old story, Honest ABE said we will remain a republic only as long as the politicians figure out how to get their hands in the till.


Deanne March 2, 2019 at 4:11 am

Why worry about the future? Aren’t most people running up their credit cards to the max? Why wouldn’t the states, run by these same types of people, do the same?

On a more serious note, these people who think they can postpone or ignore the reality of their financial choices in the present apparently don’t realize what a bind they are putting their children and grandchildren in. They are not only harming themselves, but their own descendants. Have reasoning and logic completely disappeared? Possibly…

Several years ago, a local higher math teacher in my N. H. town put a sign in front of her house, encouraging people to vote for the school budget (an increase, of course). When the new budget passed and her property taxes increased, she was very upset. As a homeschooler and non-socialist (including socialized education), I was quite amused. Here was a school teacher – not just a teacher, but a MATH teacher – and not just a math teacher, but a HIGHER MATH teacher – who couldn’t put two math facts together in real life. That is, when a school budget, funded by property taxes increases, more property taxes will be required to fund the higher budget – including HER property taxes. In this case, her raise was inextricably linked to her property taxes, but I guess this connection completely escaped her.

Well, this is at least part of the reason for the situation we all find ourselves in – New Hampshire, as well as Vermont.


Peter Morgan March 2, 2019 at 1:46 pm

Here’s a radical idea: Cut back on welfare and other entitlement programs OR cut back the pensions to the teachers! Since our teachers are so liberal in this state, I am sure they won’t mind.


mike March 3, 2019 at 6:16 pm

Wonder if the folks in Montpelier are as sloppy with their personal finances as they are with our hard earned tax dollars. Doubtful. If you want more if the same incompetency, the answer is quite simple – keep electing and reelecting these people. One way to solve these problems is to vote.


Gerry March 3, 2019 at 7:09 pm

The state needs to stop Defined Benefit plans. Make existing ones pay at 62, no earlier. Retirement Healthcare should not exist. Use Medicare like the rest of us. Have defined contribution plans with match. The Critical Access Hospitals are going belly up. Focus on fixing this system. We do not have an economy that is dependent on out of staters tax dollars. We need to attract business. Not by tax wavers but by cutting taxes and restrictive regulations.


Gerry March 3, 2019 at 7:12 pm

Sorry the next to the last sentence is suppose to read. “We have an economy”, not “ we do not have an economy”.


Gerry March 3, 2019 at 7:50 pm

Truth in accounting ranks Vermont’s Fiscal status an “F”. Each taxpayer owes at least &20,000 to pay off debt.


Monte A. Mason March 6, 2019 at 2:22 pm

Can someone give me some background on David Coates? Where does he live (Vermont)/ Is he a native Vermonter? What did he do during his working life?


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