JLARC sounds state employee, teacher benefits warning

Virginia lawmakers just got a wakeup call from their legislative watchdog about the dangers of reducing retirement benefits or shifting pension costs for state employees and teachers.

The state cannot afford to substantially reduce employee benefits without risking Virginia's competitiveness in hiring and retaining talent, the Joint Legislative Audit and Review Commission was told by its staff on Monday.

Already, Virginia is "marginally competitive" in total compensation with private and public employers, primarily because of salaries that lag significantly below the median paid elsewhere, a JLARC report said.

"It certainly demonstrates that we have fallen behind, even more so on the salary side of the equation," said Del. S. Chris Jones, R-Suffolk, a JLARC member and chairman of the House Appropriations subcommittee on compensation and retirement.

State employees haven't had a raise since 2007, except for a 5 percent increase approved this year to offset a new requirement that they contribute 5 percent of their pay toward their pensions. Employees hired after July 1, 2010, already face tighter eligibility and reduced benefits for retirement than veteran workers.

"Further benefit changes without salary increases could place the state outside of the competitive range," said Tracey Smith, lead JLARC analyst for the study.

The report, requested by state legislators because of concerns over long-term funding of the Virginia Retirement System, could fuel a fight between members of the General Assembly and Gov. Bob McDonnell, who has said publicly that state employees need to pay more of their pension cost.

McDonnell said pension reforms will be a major priority in the assembly session that convenes Jan. 11 and the two-year budget that he will present next Monday. The governor's staff had no comment on the study's findings but called the report helpful to the governor.

"He will review this report and evaluate its recommendations as he finalizes his pension reform plan," spokesman Jeff Caldwell said Monday.

The report considers a range of potential changes, including increasing employee contributions from 5 percent to 7 percent of pay — and up to 9 percent for state police, judges and other employees who receive enhanced benefits — or capping the state's share at 5 percent and requiring employees to pay more.

However, JLARC staff strongly recommended against requiring state employees or teachers to pay more of their salary toward pension benefits, especially since the state itself often has not paid its full share of pension costs.

The governor and legislature withheld more than $620 million in pension contributions in the current biennium to balance the budget, adding $1.6 billion to unfunded long-term liabilities for state and teacher pensions, the report states.

"They're going to have to pay the bill — the bill is due," said S. Robley Jones, lobbyist for the Virginia Education Association, which opposes further reductions in retirement benefits for teachers.

The report recommends a fiscal analysis whenever the proposed contribution rates are less than those certified by the VRS Board of Trustees, as has happened every year but one since 2000.

Robert P. Vaughn, staff director of the House Appropriations Committee, said the report wrongly accepts the VRS' conservative assumption of long-term return on retirement-system investments, not the assumption used by the legislature.

As a result, Vaughn said, JLARC faults the state for not funding certified rates that lawmakers consider unnecessarily high.

However, he acknowledged the state will face big increases in contributions to employee and teacher pensions in the next budget to make up for payments not made in this biennium.

Del. Jones called Monday for full funding of contributions for state employees, based on the assembly's calculations, and phased-in increases for teacher pensions to ease the burden on local governments that pay two-thirds of the costs.

Jones also favors looking at options for changing retirement benefits for all employees, such as reduced cost-of-living adjustments, that staff estimated could save a total of $1 billion over 10 years with minimal effect on hiring and retention of employees.

However, the staff cautioned that some of the changes could face legal challenges by reducing benefits for current employees and recommended that the attorney general render legal opinions before changes are made.

The report also adds fuel to the debate that began earlier this year over whether Virginia should offer an optional defined contribution plan, such as a 401 (k), as an alternative to a traditional defined benefit pension.

Such a plan would be attractive to younger, newer employees, but could cause costs to increase by as much as $944 million over 10 years, the study estimates. In contrast, the report said a hybrid plan that combines the traditional pension benefits and contributions controlled by employees could save the state money.