VRS Under the Microscope
With a few days left before our Senate budget is presented, all eyes are on the Virginia Retirement System (or "VRS"), which holds the pensions for hundreds of thousands of state and local employees.
The VRS has a current value of $48B, which is roughly 80% of its value from fall 2007 when the stock market was at its zenith. Currenlty, the state and localities make about $1.1B a year in contributions to VRS. That's a significant share of our state budget.
There are two major characteristics of VRS:
1. It is a defined benefit plan. Under a complicated formula, state employees receive about half their salary via pension once they reach thirty years of service and sixty years of age.
2. The state makes the employee contribution, which is about 5% of salary, as well as its own matching contribution (this is a differnence from 401k plans, where the employee makes their own payment).
VRS has been a solid and stable agency for many, many years. Its solvency is a direct reason for our "AAA" bond rating.
Last fall, Governor Kaine proposed that state employees begin to pick up a share of their contribution, which could save the state hundreds of millions.
This week, Governor McDonnell rescinded Kaine's proposal. Instead, he will keep the state paying the employee's share. However, the state will reduce its contribution by $508M over the next two years -- a tactic which puts the plan in peril.
This deliberate "underfunding" will then be (theoretically) remedied by significantly tightening the rules for state employees joining after July 1, 2010. Those new employees will become responsible for their own contributions to VRS and subject to new restrictions on the length of their pension.
This is a complicated issue and I'm giving highlights. The Senate Finance Commitee needs to study this. With the short time lag on the budget, we have to decide whether we add the $508M "VRS loan" into our budget -- and use that to make up funding cuts for public schools. That is the short-term question.
The Federal Government went through this years ago when they converted their Define Benefit Plan to a Defined Contribution Plan - as have many companies also done.
They offered existing employees the option of keeping the original plan or joining the new plan - with some sweeteners.
It's probably time for the State to do this and if you do it in such a way that it allows employees to put more of their money in a 401 with a tax-free contribution.. it may well end up a win-win for all.
I thought you guys had some serious staff folks along with the JLARC and Auditor of Public accounts to advise on these issues....
or perhaps I'm ignorant and what you're talking about is part of it....
Times like we have now - in my view - are the perfect opportunity to do some serious reforms that cannot be accomplished when money is more flush.
The VRS payment is what is really hurting Fairfax County Public Schools. As of 25 January 2010 the biggest reason for cuts in FCPS FY2011 budget is because of an increase in payments for retirement plans in the amount of $71 million. By keeping the budget flat from FY2010 to FY 2011 means that $71 million in programs and positions have to be cut for FY2011 to make those other increased payments.
See the data and analysis of the FCPS FY2011 Budget from the Fairfax County Taxpayers Alliance.
https://sites.google.com/a/fcta.org/fcta---home-page/data/fx-public-schools/20111-fcps-budget-notes
Note that in 2009 spending per pupil was $12,839. In 2011 it's projected to be $12,869. Inflation hasn't gone up that much so if spending per pupil is the same as 2009 why can't we have the same level of school services as 2009? The answer always points back primarily to the FCPS employee retirement plans. It is gobbling up money from a fixed budget.
Can someone explain why the pension fund contributions keep going up faster than inflation?
Why do we not contribute a fixed amount to these accounts?
If it is to maintain the payouts in a defined benefits context - it really does put extreme pressure at exactly the wrong time in down economies...
What you'd want, I would think... in a way to slow down payments when times are tough and to accelerate when times are good.. i.e. adapt to the fiscal climate.
LarryG -
I'll take a guess. The pension plan is funded based on an actuarial calculation that includes a lot of factors - hires / retires, special incentives for early retirement, RIFs of people eligable for retirement, inflation, estimated life span, gains and losses on the investments, etc.
I seem to recall that there was a certain balance that had to be in the fund before it could be considered "fully funded" by independent auditors. I also recall that being "fully funded" with regard to your pension plan affected your debt rating and your interest rate on that debt. So, the Commonwealth may not have total flexibility in deciding how much money to contribute to the fund each year.
I recall all this through the haze of 20 years of time when my Dad was retiring from a defined benefits pension and he explained it to me. So, if I am off base I'd be happy to hear where I have strayed.
One big question is whether Gov. McDonnell's proposal to cut contributions to the plan will create a situation where Virginia's debt rating will fall. While a reduced debt rating is not the end of the world I imagine that some of the debt covenants on the existing debt would require higher interest payments if the rating were to fall. Additionally, future borrowing will be at higher rates until the fund is, once again, fully funded (and the debt rating rises).
Gov McDonnell may believe that Virginia's debt rating will sink regardless of this decision. I imagine that the debt rating agencies are all thinking long and hard about the quality of state and municipal debt in this economic climate.
Finally, I believe there is a good guidepost as to what will happen in Virginia. Oddly, that guidepost is Ireland. If you Google "Ireland & Budget 2010" you will see how the Irish national government reacted to their recession-fueled lack of tax revenue. Fundamentally, they made cuts rather than raise taxes and those cuts look a whole lot like Gov McDonnell's budget recommendation.
McDonnell ... that's an Irish name, no?
Irish yes.. but for some reason, he does not exude an Irish persona... probably my issue...
but this is an historic moment for him and for the Republicans.
I always respected the Republicans of old because they were willing to do the effort necessary for intelligent surgery on the budget... often made necessary by the excesses on their Democratic counterparts.
But now days.. the Republicans have a bunch of idealogical yahoos running amok full of spit and vinegar but shy on the details.
So.. McDonnell can..bring back some respectability to his party by demonstrating that good government does not have to be partisan...
Lord we need it so I got my fingers crossed.