Public employees may have to pay full pension costs

Virginia legislators are preparing to take a fresh look at whether to require state and local government employees to pay their full share of pension costs.

Faced with rising rates to pay for long-term liabilities, members of the General Assembly are considering requiring all public employees — not just those hired after last June 30 — to pay 5 percent of their salary toward their pensions.

The legislature also is likely to discuss whether to offer state employees the option of contributing to a 401(k) plan they can manage themselves instead of a defined-benefit plan run by the state.

"There is no doubt this issue is going to be revisited this session," said Del. S. Chris Jones, R-Suffolk, chairman of the House Appropriations Committee's subcommittee on compensation and retirement.

Jones also said he is disappointed that most local governments and school systems chose to pay for new employees' share of pension contributions.

* * * * *A new law took effect July 1 that required new state employees to contribute 5 percent of pay toward pensions but gave local governing bodies the option of covering the cost for new hires.

More than 80 percent of school systems and local plans opted to pay the employee share, according to the committee, which said local school systems alone could have saved $9.5 million by shifting the cost for new hires.

"I think that was a mistake," Jones said.

Chesterfield County was one of 26 counties that chose to require new employees to pay all or part of their 5 percent pension share. The county shifted the entire 5 percent to local employees, but the School Board chose to continue paying the share for teachers and other school employees.

"Our feeling was it is inevitable, so we bit the bullet," said Chesterfield County Administrator James J.L. Stegmaier.

Teacher advocates say local school systems would be at a competitive disadvantage in hiring if they were to shift the pension cost to employees.

"It's going to make it that much harder to get good people in the classroom," said Robley S. Jones, lobbyist for the Virginia Education Association.

The VEA, along with advocates for police and sheriff's departments, lobbied successfully this year to persuade Gov. Bob McDonnell to veto a provision of the new law that would have allowed localities the option of shifting the cost for existing employees.

The new law enacted sweeping reforms of the state pension system to reduce the cost of future benefits and require new employees to pay 5 percent of pay into their pensions. The changes are expected to save the state billions of dollars in pension payments over the next 10 to 30 years.

But the governor and the legislature also deferred paying $620 million into the state and teacher pension plans to balance the $70 billion biennial budget. That diminished the retirement system's ability to pay future liabilities at the same time it lowered its expectations for returns on market investments. The result is intensified pressure on contribution rates, which will be reset in 2012.

McDonnell has promised to begin making up those deferred payments in the coming year, but he wouldn't say last week whether he will propose to reverse a 27-year-old deal that allowed the state to cover employee shares of their pensions instead of raising their pay.

In an interview last week, McDonnell said he will recommend changes to the retirement system when he reveals his proposed budget amendments Friday, but he would not elaborate.

"What I'm interested in is the long-term solvency of the retirement system," he said, adding that he has 22 years of state service vested in the system.

McDonnell said he created a work group several months ago to consider pension options. He cited concerns about unfunded, long-term liabilities; the increasing number of employees retiring; and the potential for big increases in employer contribution rates next year.

"The numbers just don't add up," he said.

Legislators, especially Republicans in the House of Delegates, say it's an issue they must address again in the session that begins Jan. 12.

"It's a concern to many of us as we look at long-term liabilities," said G. Paul Nardo, chief of staff to House Speaker William J. Howell, R-Stafford.

One option would be to swap a 5 percent raise in exchange for existing employees picking up their 5 percent pension contribution, said Robert P. Vaughn, staff director of the House Appropriations Committee.

"I think the governor could do it," Vaughn said, adding that McDonnell has heard from legislators about their concerns.

Vaughn estimates that such a move would cost the state about $11.6 million a year in federal payroll taxes on the higher pay, but it would eliminate the current distinction between state employees who pay a share and those who don't.

That distinction also is a problem at the local government level, where few localities chose to shift all or part of the pension contribution to new hires.

"We've always had a problem with benefits that are given for one set of employees and not for another," said Mary Jo Fields, a budget analyst at the Virginia Municipal League.

The VML and the Virginia Association of Counties wanted the option this year of making existing employees pay their share, as well as new ones. "In general, we support local authority to make their own decisions," Fields said.

It doesn't matter to the Virginia Retirement System who pays the contribution, but local officials are getting a lesson in the kinds of budget pressures they could face in the near future to pay for employee pensions.

For example, Chesterfield and Henrico counties would face a 4 percent increase in rates for local government employee pension plans if this were a rate-setting year, according to recent estimates by the system's private actuary.

Those pressures also apply to teachers covered by the state plan because local school systems pay about 66 percent of the cost on average, according to the VRS.

Robert P. Schultze, the system's director, said he has been talking to local government officials and school superintendents about the situation they might face soon.

His message is: "You're going to have to consider getting your employees involved in sharing the cost of the pension program."

mmartz@timesdispatch.com

(804) 649-6964

Staff writer Olympia Meola contributed to this report.