State should pay what it owes VRS

As the chief patron of a constitutional amendment that would have required the state to pay the retirement contributions established by the Board of the Virginia Retirement System (SJR 371), I read your editorial, "State pension: Passing the buck" with great interest. It's gratifying to see a newspaper with the stature of the Times-Dispatch informing the public on one important fact: Public employees did not create the current underfunding of the VRS.

How did the situation come about? As you point out, it did not happen overnight. It is the result of long-term underpayment of the contribution rates established by the VRS Board of Trustees. The commonwealth simply has not paid the bills presented by the VRS board for the benefits it has promised to Virginia's public employees.

Pension funds are generally seen as being well funded if they have 90 percent or more of the funds needed to pay their long-term obligations. Less than that can be acceptable if the pension program's funded status is improving. How does the VRS stack up? The VRS program for general state employees was about 75 percent funded at the end of the 2010 fiscal year. The teachers' retirement fund was only about 69 percent funded. Both were moving in the wrong direction. Investment losses due to the recession can be blamed for part of that, but as I'll explain, much can be attributed to just not paying the bill.

By way of contrast, the funded status of the VRS retirement programs for local employees, which are calculated separately, are generally much better. The average funded level for these accounts is 87 percent. What's the difference? Local governments are required to pay the contribution rate set by the VRS Board of Trustees. It's that simple.

There are three approaches to solving this problem: (1) cut retirement benefits, (2) shift the cost to someone else, or (3) pay the bill. The commonwealth has already done the first two.

In 2009, the General Assembly approved sweeping changes in the VRS retirement programs offered to future public employees. Most of these changes reflected recommendations contained in the 2008 report by the Joint Legislative Audit and Review Commission (JLARC). Some went beyond that. It's important to note that the JLARC report did not find existing retirement benefits excessive. The JLARC report was quite frank in setting out options to address "[The] historical tendency for the contributions to the VRS retirement plan to be funded at less than the amount actuarially recommended." These changes were not about reforming an overly generous retirement program, but they were about cutting costs that the commonwealth was unwilling to pay.

In 2010, the governor proposed that state employees once again pay a share of their retirement costs. This isn't unreasonable, but the original proposal would have resulted in public employees taking a 2 percent cut in take-home pay, on top of a salary freeze now in its fourth year, and when they were already being asked to get the same work accomplished with fewer staff. The compromise was to offset the cost shift, which still resulted in a slight pay cut for most state employees.

What about paying the bill? No statute that can force the governor and the assembly to pay the VRS. It's not like a bill to an outside vendor such as the power company; which, if ignored, could cut off service for nonpayment. The commonwealth is very good at paying those types of bills. The contribution rates set by the VRS board are essentially a bill the commonwealth sends itself. Any statutory requirement for payment of such internal obligations can be easily overridden.

This is why I introduced SJR 371, an amendment to Virginia's constitution that would require the commonwealth to pay the VRS contribution rates set by the VRS board in all but the most extreme cases. This amendment, which would have gradually moved Virginia back to full payment of the required retirement contributions over a period of time, passed the Senate with bipartisan support only to die in a House subcommittee on the thin pretext that the VRS board is mentioned nowhere else in the constitution. The real reason is that some still want a loose lid on the cookie jar.

How much difference would paying the bill make? I posed that question to the VRS, and the answer is startling. If the commonwealth had simply paid the VRS bills it has received over the years, the state employee retirement fund would be 84 percent funded, and the teachers' fund would be 79 percent funded. Not perfect, but pretty good considering the state of the economy.

On top of that, annual contribution rates would be about 3.8 percent lower than they are now. That might not sound like much until you realize that the savings to the state and school divisions would be over $400 million annually.

Once again: You are correct in asserting that the underfunding of the VRS is not a problem caused by public employees, or the excellent staff at the VRS. My hope is that when the governor begins his discussion with the General Assembly, he puts a requirement that the commonwealth pay its bills at the top of the list.