Saturday, November 6, 2010

VRS Sounds the Alarm

Last session, the State Budget was balanced in-part by the State deferring about $690 million of retirement contributions and promising to pay them back over the next 10 years. At the time, we were told that stock market gains had filled the Virginia Retirement Systems' coffers and that we could afford to do this.

Localities were also given the same option and many local governments who use VRS - such as Fairfax County Public Schools - did the same thing. It balanced the budget, but it mortgaged the future.

I voted against the Budget for many reasons, including this strategy and I wrote about it extensively at the time we passed the budget.

This move would be the same as deciding not to contribute to your 401K for one year and making your contribution in the future. This kind of move is not fiscally conservative or prudent. It is risky. I also did not think that the writers of the Constitution of Virginia would think that a budget was balanced if you used a gimmick like this - from my point of view, this was de facto borrowing which is prohibited in Virginia.

The Pew Center on the States has also estimated that state pension funds across the United States are underfunded by $1 Trillion. They list Virginia as underfunded by $10.4 billion (before this year's actions). For some perspective, $10.5 billion is one-third of Virginia's two-year General Fund Budget.

Two weeks ago, the Trustees of VRS sounded the alarm:

The retirement system's board of trustees vented its frustration yesterday over the state's repeated failure to pay the full contribution needed to fund long-term obligations fully for future retirees.

In the budget year that ended June 30, the system paid $1.5 billion more in benefits to retirees than it received in contributions, and the gap is expected to grow to $2 billion this year.

Investment income has more than compensated for the difference, but VRS officials say the failure to pay recommended payroll rates for pensions raises concerns about the system's viability.

"It's incumbent on this board to make clear the funded status of this fund is in serious jeopardy," said Edward T. Burton III, a University of Virginia economics professor who has served on the board since 1994.

This is not a year when the board recommends contribution rates to the General Assembly for state employee and teacher pensions. However, rates would have to increase by more than 60 percent over last year's rates to fund long-term retirement obligations fully, according to an actuarial analysis presented to the board yesterday.

The rates would have to increase by more than 150 percent from those adopted by the General Assembly for this fiscal year.
The Richmond Times-Dispatch penned an editorial today seconding this problem.

There are many folks on the other side of the aisle from me who are also concerned about this and believe we need to repay the "borrowed" money as soon as possible. This entire exercise is symptomatic of our present collective failure to deal with difficult political problems head on. We have responsibilities whether they are pensions, transit, roads, school facilities, higher education, or secondary education that we are not meeting. The Federal Government is likewise spending money it doesn't have.

We can only put off reality so long. It will be interesting to see if anything happens or whether our VRS deficiency ends up consuming the budget.

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