State might ask workers to contribute to their retirement

Gov. Timothy M. Kaine's proposal to defer a quarterly payment into the pension plan for state workers next spring may be just the first step toward a shift that could require workers to contribute a portion of their paychecks toward their retirement.

"He is going to look hard at state employees making a contribution to the system," Secretary of Finance Richard D. Brown said. "At the end of the day, it may well be that state employees will be making a contribution."

What hasn't been resolved, Brown said, is "what level that is going to be."

Virginia's state government employs about 100,000 people. It is the largest employer in the Richmond region with nearly 26,000 workers.

Kaine on Tuesday made the pension-deferral proposal as part of a series of broad, recession-driven cuts to state spending to make up for a projected $1.35 billion revenue shortfall in fiscal 2010.

The governor said deferring the state's quarterly employer payment into the Virginia Retirement System would trim $104 million from the fiscal 2010 budget.

Kaine said the deferral would not affect the retirement benefits of the 600,000 participants in the VRS, and officials noted that the state still would be obligated to restore the money to the plan over time.

Currently, the state, as an employer, contributes 6.26 percent of each state worker's annual salary into the VRS. The percentage of the state's employer contribution varies every budget cycle. It is calculated based on actuarial studies of how much money is needed to keep the plan adequately funded.

But Virginia also pays the employee portion of the plan, contributing an additional 5 percent of a worker's annual salary. Kaine's proposal would defer the state's 6.26 percent payment in the final quarter of fiscal 2010, which ends June 30.

Virginia's current pension-contribution system was put in place in 1983 when the General Assembly agreed to pay workers' contributions to the VRS in lieu of a pay raise.

Today, the plan is rare among the states and has come to be viewed as a substantial benefit, as tough economic times have forced other governments and the private sector to scale back or eliminate employee retirement plans. State workers in Maryland pay 5 percent of their salary to their pension plans; North Carolina workers pay 6 percent.

A 2008 study by the Joint Legislative Audit and Review Commission, the state legislature's watchdog agency, found that only four other states did not require state workers to contribute to their government pension plans.

The study also recommended phasing in a 2 percent, pretax salary contribution as employee pay increases to close the anticipated funding shortfall in the system. But the study was based on figures collected before the collapse of the financial markets, during which the VRS lost 21 percent of its assets.

The latest actuarial study on what percentage of spending will be necessary to fund the pension adequately will be completed in October.

Kaine and his budget team signaled a change in pension funding was in store when they outlined the latest round of cuts Tuesday.

The deferral, according to the reduction plan, "will take place in conjunction with a plan to change retirement rates for the commonwealth and its employees beginning in the next biennium to address the anticipated rate increases and the long-term funding status of the retirement system."

Robert P. Schultze, director of the VRS, said preliminary internal estimates suggest the system will need increased contributions of 4 percent to 6 percent of the current payroll to fund pension liabilities over the next 20 to 30 years that maintain the current level of benefits for future retirees. Current retirees are guaranteed the same level of benefits they currently are receiving, he said.

The question is, from where will the additional funding come? The state could increase its contribution, implement a version of the JLARC recommendations and ask employees to pitch in the difference over time, or do a version of both. Or lawmakers could make changes to the pension-plan benefits going forward that effectively reduce costs by limiting the benefits to future retirees.

Kaine's four-year term expires in January. Before he leaves office, the governor will write the budget for the next two fiscal years, 2011 and 2012. With the nation still enduring a rough economy, a continued forecast of a lag in state revenue and fewer federal stimulus dollars to subsidize state programs, Kaine has said he would present an austere spending plan in December.

But while the governor writes the budget, all appropriations are subject to the approval of the General Assembly, which will convene under a new governor in January.

"The governor and his folks won't be around to defend or advocate, so it will really be a legislative issue," said Ron Jordan, head of the Virginia Governmental Employees Association, which represents a cross-section of about 20,000 state government employees in all agencies.

Jordan said the JLARC study should form the framework for the discussion of how best to resolve funding the pension. But he noted that the General Assembly last year opted not to make any changes until the economy improves.

"Things have only gotten worse since that time," he said.

Jordan said the association would oppose any changes to the current system without pay increases for state workers, including performance pay and salary levels that close the competitive gap between government jobs and the private sector.

Contact Jim Nolan at (804) 649-6061 or .