State workers would contribute an additional 1 percent toward their retirement under a plan that Gov. Bob McDonnell proposed Thursday to help strengthen the state's underfunded pension system.
He also wants to offer employees the choice of a hybrid plan combining a 401(k)-style defined contribution system with a defined benefits program, and to change the formula for cost-of-living adjustments.
McDonnell, whose proposed budget injects $2.2 billion in state and local contributions into employee and teacher pensions, told workers on Thursday that after reviewing financial projections and meeting with advisers, "the simple truth is our state retirement system cannot be stabilized absent increased contributions from both employer and employee."
State workers' contributions would tick up from the current 5 percent — which was established last year and offset by a 5 percent pay raise — to 6 percent, rising 0.5 percent in each of the next two years.
"It's a pay cut," said Ron Jordan, executive director of the Virginia Governmental Employees Association.
"You can combine this additional money out of state employees' paycheck with the premium increases contained in the introduced budget; we got a good pay cut."
McDonnell noted Thursday that he gave employees a 3 percent performance bonus in December 2010 and has offered another one-time 3 percent bonus in December 2012 if workers meet certain savings goals.
"It is my intent that the impact of the additional employee contribution of 1 percent will be more than offset in fiscal year 2013 by my proposed performance bonus of up to 3 percent," McDonnell wrote in a memo to state workers sent before a public announcement on Thursday.
His plan would also calculate a worker's average final compensation over 60 months, rather than 36.
McDonnell's recommendations come on the heels of a report by the Joint Legislative Audit and Review Commission, whose staff strongly discouraged any proposal to increase the employee share of retirement contributions.
The governor and legislature withheld more than $620 million in state contributions to the pension fund to balance the current two-year budget that ends June 30, adding $1.6 billion to unfunded long-term liabilities for state employee and teacher pensions, the report states. The plan is underfunded by roughly $19 billion.
JLARC staff said the state cannot afford to substantially reduce employee benefits without risking Virginia's competitiveness in hiring and retaining talent. 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, the report said.
McDonnell said Thursday that he's not concerned that the plan changes would hurt recruiting. He said the state will still have a "very favorable retirement system."
"We haven't seen any reason to believe that asking state employees to pay another 1 percent or having a tweak in the cost of living adjustments is going to have people not come to work for the commonwealth of Virginia."
McDonnell also told state workers in the memo that he is postponing changes to the employee leave program. He says he will continue to explore ways to simplify the system "in a manner that is fair, easy to understand, and beneficial to all state employees."
His government overhaul commission recommended the program be simplified.
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