VRS employee contributions expected to increase

The Virginia Retirement System is back on track with stock market earnings.

But don't bet on the state avoiding the need to raise contributions in the next two-year budget to pay pension and other post-retirement benefits for state employees and public school teachers.

"You can't invest your way out of these unfunded liabilities," said Diana F. Cantor, chairwoman of the VRS board of trustees, after a lengthy briefing of state legislators Monday.

Cantor and other VRS officials told members of the Joint Legislative Audit and Review Commission that the retirement system has recovered most of the nearly $20 billion it lost in the value of investments during the recession.

The system's recovery was especially strong in the year that ended June 30, with an estimated return on investments of 18.5 percent.

But with more teachers and state employees retiring as the system's participants age, VRS officials warned legislators that state contributions will have to go up to pay pension and other retirement benefits.

"Our highest priority in the near term is to work with you and the governor to restore contribution rates to actuarially prudent levels for the next budget period and beyond," Cantor said. "Contributions will have to increase to meet our obligations over the long term."

The VRS will learn how much contributions will have to rise for state employees and teachers when it meets with its actuary in October. The system estimates that the actuarial status of the state employee and teacher funds will continue to decline for two more years and then begin to climb — but only if the state increases contributions.

"It'll be a long and slow incline from the bottom," said VRS Director Robert P. Schultze.

In this fiscal year, the state is contributing $273.4 million a year toward state and teacher pensions, or less than 2 percent of the $16.5 billion general fund budget, Schultze said.

Those contributions are much lower than they would have been if Gov. Bob McDonnell and the legislature had not withheld about $620 million to balance the two-year state budget last year. This year, the governor and legislature restored about $142 million, most of it for teacher pensions, which are financed by the state and school districts.

The pressure on contributions increased with the board's decision last year to set its assumed long-term return on investment at 7 percent a year instead of 7.5 percent. The General Assembly, in deciding what rates to fund, assumes an 8 percent rate of return on investments, which account for two-thirds of the money available to pay system obligations.

Sen. Charles J. Colgan, D-Prince William, chairman of JLARC and the Senate Finance Committee, said after the meeting that he hopes the differing assumptions used by the VRS board and the General Assembly are addressed in a JLARC study of the system that will be completed by the end of the year.

While the system's investments have recovered, Colgan said, "you're still paying out more than you're putting in."

Charles W. Grant, the system's chief investment officer, said the 7 percent benchmark is wise, despite high investment returns last year. He cited the uncertain recovery from recession and the high-level political talks under way in Washington about reducing the federal budget deficit and outstanding debt.

Cantor's husband, House Majority Leader Eric Cantor, R-7th, is a key player in those talks between members of Congress and President Barack Obama. (Diana Cantor is a member of the board of directors of Media General Inc., which owns the Richmond Times-Dispatch.)

Grant said government debt appears to be a major drag on the economic recovery, but he would not speculate on the possible effects of cuts in federal spending on defense and other areas that contribute significantly to Virginia's economy.

"We're in uncharted territory here about the possible impacts of deficit reduction," he said.

Grant is scheduled to step down as chief investment officer Aug. 1 after six years in the position. The VRS board is undertaking its second round of interviews with candidates for the position, which was created after state reforms of the retirement system 20 years ago.

He finished his final briefing of state legislators to a round of applause and a salute from Colgan, who said, "You are going to be a very difficult person to replace."