Wednesday, July 15, 2009

Virginia’s Retirement System in a Lurch

Virginia's funds aren't in as healthy shape


Robert T. Schultze is the director of the 24th largest public or private pension system in the United States, the Virginia Retirement System (VRS). On Monday, he and his staff reported to the Virginia General Assembly’s Joint Legislative Audit and Review Commission (JLARC) that VRS assets have lost about 21% over the first half of this year. You can read more about the Monday meeting from several media sources: Richmond Times, Forbes, Washington Examiner.

According to Charles Grant, CIO of VRS, the teacher fund has dropped to 69.9% funding level. Whenever a fund drops below 70% funding, red flags begin to fly. Grant went on to predict that he expects the fund to drop to a 60.3% level by 2013.

Robley Jones, who heads the Virginia Education Association Government Relations office, has another perspective on the current VRS dilemma. While the media covering the VRS retreat have characterized it strictly as a market loss scenario, Jones points out that it’s much more than that.

On December 17, 2007 the Pew Center of the States released a study about state pension systems entitled “Promises with a Price.” The Virginia fact sheet released with that report stated that “…Virginia’s funds aren’t in as healthy shape as they used to be, and the state has stumbled a bit in making its full annual contributions toward its long term obligation. The funding ratio of Virginia’s pension plans dropped fairly substantially between 2001 and 2005, and in the last 10 years, the Commonwealth has frequently made less than the annual required contribution, as set by its own actuaries.”

You combine this historical underfunding of the VRS system with the 2008 market meltdown, and you find yourself in the mess we are in today.

Last October, VRS advised JLARC of six actions that could be taken to help bolster VRS. Monday, the six options were brought up again at the meeting. Without a doubt, implementing all of some of these options would radically redraw the VRS upon which teachers have come to rely. VEA GR summarized the six options and added brief comments.

1 – Impose an additional 2% employee contribution. This would be in addition to the 5% employee contribution now paid by your employee who also pays the employer contribution. This 2% might be phased-in .5% at a time in years when raises are granted.

2 – Increase the minimum retirement age for non-vested and new hires from 50 to age 60. Note: One becomes vested in VRS after five years of service.

3 – Change the Cost of Living Adjustment (COLA) on retirement benefits by capping the increase at 4% a year rather than the current 5%. FYI – if, for purposes of illustration, you retroactively applied this change in the COLA to one who retired in 1978, the reduction in benefit would be 6% over the first 10 years and 12% after 30 years in retirement.

4 – For new hires and non-vested employees combine a defined benefit (DB) and defined contribution (DC) plans. The DB plan would have a lesser benefit than the current VRS benefit. Employees would contribute to both. The COLA would only be included in the DB plan. This plan would provide 85% of the benefit in the current plan.

5 – Require a Cash Balance Retirement Plan for new hires and non-vested employees. This is like a traditional defined contribution plan, except for the fact that a 5% return is guaranteed. Employees contribute with an employee match that increases with years of experience. There is no COLA on benefits. Entire balance can be withdrawn when separating from service.

6 – Require a Defined Contribution Plan for new hires and non-vested employees. The matching contribution from the employer would increase with years of service. No COLA would be provided and the entire balance could be withdrawn when separating from service. Only two states now have this. The plan would provide 52% of the benefit value of the current VRS plan.

Politically speaking, this is the second time that VRS officials have reported to JLARC in the past nine months. Both times, VRS officials have raised the six options in the minds of the audit and review body. If this battle were a bike race, this tactic would be known as positioning the rider for the sprint to come. From the perspective of a public employee, Rob Jones says it best, “The recession is only part of the reason for the current VRS shortfall. The failure of the General Assembly to honor the VRS actuary’s recommendations plays as large”. [emphasis added] Without a doubt, the battle for VRS is positioned to be a main topic of discussion during the upcoming General Assembly session.

Thanks to Thom Ryder, Past-President of RCEA  for this submission.

Posted By Valerie Garner

Categories: Education

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