The Virginia Retirement System that provides retirement benefits for state and local government and school employees has significant issues. It is an old-line defined benefit plan. The system has been under funded for years. Jurisdictions around the state, but not Alexandria, have taken advantage of opportunities to defer contributions.
Virginia's State Legislators have been unable to fix the VRS and usually raised benefits while deferring the funding that would allow them to be paid. Increasing salaries and earlier retirement options have further strained the system.
The legislature this year passed a measure that is sitting on the governor's desk awaiting signature. The measure provides that all employees under the VRS hired after January 1, 2010 must pay 5% of their salary into VRS each year.
The twist in this legislation, however, is that all local governments, school divisions and the state government itself must give those employees a 5% pay raise. By the simple logic of the state legislators, this will cover their increased contribution.
First of all, it does not work that way. Salaries are taxed by the federal and state governments and there is no exemption for VRS payments. Depending upon their combined tax rate, employees will lose 20 to 40% of the increase and will simply be out of pocket for the rest of their increased contribution.
Second, it is not clear that this action will fix VRS. It is nice to have new employees paying more to cover their own retirement cost but what about the tens of thousands of existing employees who will be retiring long before those hired in 2010. We are looking at 30 years of massive benefit flows out and no increased funding coming in unless the idea is to use this new source of funds to cover those expenses. If that is the case then once more the legislature is just kicking the can down the road.
Third, this is a serious financial blow to local governments and school divisions who now have to come up with significantly more money at a time when their budgets have already been drafted and submitted. Alexandria faces up to $5.5 million for city and school system employees if the city pays the entire amount this year. It is not possible for the city to pay for this by a tax increase through a real estate tax increase even if City Council chooses to do so in an election year. Council has already published the maximum real estate tax rate for next year and it does not include the $5.5 million to fund the proposed pay raise.
Fourth, this action avoids serious reform of VRS. Defined benefit programs are becoming too expensive to operate. Other states have been phasing them out for decades.
The State of Washington operates a three tiered system. Employees participate in social security. Employees participate in a supplemental State retirement system. Employees may participate in an individual retirement system as well. Washington began implementing this system in the 1970's. They now are among the most solidly funded pension systems in the US.
The Governor should not sign this current legislation. He should defer it and demand the kind of in- depth review of VRS programs that is required to bring it into the 21st century. The US economy is changing and the optimistic assumptions about returns on investments in bonds and stocks are not proving valid. Earning the kinds of returns that defined benefit plans need to allow them to pay out generous pensions based on a three year average high salary is not possible without taking great risks.
This Governor has already taken a hit with his less then thoughtful support for measures that stripped women in the Commonwealth of their rights and dignity. He does not also need to be remembered for launching one of the largest unfunded mandates on local governments in the modern history of the state.