Friday, December 16, 2011
Virginia Gov. Bob McDonnell's plan plows billions into state pensions
The plan also places new strains on local governments, which would help cover teacher retirements.
The latest from our Blue Ridge Caucus politics blog
From The Roanoke Times
RICHMOND -- Gov. Bob McDonnell outlined a plan Thursday to pump $2.2 billion of new funding into state employee and teacher retirement plans over the next two years, with nearly half of the funding coming from cash-strapped local governments.
McDonnell cast his proposal as a major step toward reducing unfunded liabilities in the Virginia Retirement System and providing long-term stability for the pension fund. He said his proposal -- part of the two-year state budget he will submit to lawmakers on Monday -- would be the largest employer contribution in the retirement system's history. About $876 million of the new funding will come from the state's general fund.
"The plain truth is our state retirement system is underfunded, and this situation threatens the system's long-term solvency," McDonnell said. "We must fund VRS at substantially higher levels so benefits will be there for the hardworking teachers, police officers, firefighters, state employees -- our neighbors, friends and family members -- who are depending on the system for their retirements."
McDonnell also announced Thursday that his budget will include a provision for a 3 percent pay bonus for state workers in 2012. The bonus would be paid if the state finishes the current fiscal year with an estimated $160 million in unspent discretionary funds and if workers meet certain performance criteria.
A report released this week by the Joint Legislative Audit and Review Commission estimated the unfunded liabilities of VRS-administered plans at $19.9 billion. The state has underfunded the pension plans for state workers and teachers, routinely paying rates less than those recommended by the VRS governing board over the past two decades.
McDonnell and the General Assembly agreed to defer $620million in pension contributions in 2010 to help balance the state budget. The plan McDonnell announced Thursday would fully fund the first two installments in a 10-year schedule to refund that money to VRS
McDonnell's proposal assumes an 8 percent rate of return on investments, more optimistic than the 7 percent rate recommended by the VRS board and its actuary. McDonnell said his proposal otherwise fully funds the VRS actuary's projections.
Virginia Education Association President Kitty Boitnott called McDonnell's proposal "an important step toward improving the funding status of the Virginia Retirement System."
But the governor's plan would put another strain on local governments, which would have to cover $1 billion of the proposed $1.6 billion increase in teacher retirement contributions in the upcoming biennium. State and local governments share the cost of funding teachers' pensions, which are administered by VRS. The funded status of the teachers' plan dropped to66.6 percent as of June 30.
McDonnell's proposal would not apply to local government employees who have VRS-administered pensions. Local governments that participate in VRS historically have funded their workers' pensions at rates recommended by the VRS board.
Local government officials were trying to assess the impact of McDonnell's proposal Thursday.
"We are very concerned about the state continuing to pass costs and responsibilities down to local governments," said Montgomery County Administrator Craig Meadows. "We have not calculated the total costs but we do know there will be a significant impact on our budget. This will be another difficult budget year in Montgomery County."
Dean Lynch, the deputy executive director of the Virginia Association of Counties, said localities "have known and understood that there has been a problem with the funded status of teachers in the Virginia Retirement System for some time."
But, Lynch said, "It's going to hurt a lot of localities because things are devolving."
Lynch noted that localities already are bearing a greater share of costs for health and human services and Line of Duty Act benefits for first responders because of recent legislative actions. Localities also are concerned that the state could try to push responsibility for secondary road maintenance onto counties, cities and towns.
Localities rely heavily on real estate tax revenue and many have seen property assessments continue to decline even as demands for funding increase.
"It's a lot of money and we don't have anyone to pass that cost on to," said Mary Jo Fields, director of research for the Virginia Municipal League.
Secretary of Finance Ric Brown said localities shoulder a greater share of the cost for teacher pensions because teachers are considered to be local employees.
"At the end of the day, these are local teachers," Brown said. "It is a statewide, local retirement plan for them and we're paying our fair share of it."
McDonnell said he will propose more pension reforms in the upcoming General Assembly session "to get our retirement system in a stronger position." He would not say Thursday whether he will ask state workers to contribute more toward their retirements.
The General Assembly this year passed legislation requiring state employees to contribute 5 percent of their pay toward their retirement plans. Workers hired before July 1, 2010, got a 5 percent pay raise to offset the requirement. The Senate rejected McDonnell's proposal to create an optional defined contribution plan.
McDonnell released his pension proposal one day after announcing plans to boost funding for higher education by more than $100 million a year The governor cautioned Thursday that his budget plan also will include cuts "in things that I felt were lower priorities."
Staff writer Mike Gangloff contributed to this report.