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Monday, March 19, 2012

VRS Changes Part II: Explaining the Changes

On Sunday, I wrote about the status of the Virginia Retirement System (VRS) and how we got to where we are.  You can read that here:

In this article, I'm going to cover the changes to VRS that were passed by the General Assembly and are awaiting the Governor's signature.  In my next and last article, why I voted against them. 

While most people probably think this is anything but exciting or interest reading, it has significant effects upon expenses at state government on local government employee costs and consequently your real estate taxes.  These issues are very complex from a legal, budgetary and monetary point of view so few news organizations have reported on these issues.  It is a big deal and it merits lots of sunlight and discussion.
The changes were contained in three bills.  The main changes were in Speaker William Howell's HB1130 relating to a hybrid plan (and a parallel bill SB498), and Senator John Watkins' SB497 which covered local governments

SB 497 - Employee Match & Changes to Local Participation
In a budget crisis in 1983, the General Assembly decided to forego raises for all state employees in exchange for assuming the employee's retirement contributions. Since that time, employee's paychecks have no reflected any retirment contribution.
  
A 2008 JLARC report noted that "Virginia was one of four states that did not require employees to pay toward the costs of their benefits." (See page 7).  A study by PriceWaterhouseCoopers and Mercer noted that "this aspect of the benefit structure was rare and “significantly increases the value and cost of the VRS benefit."  In other words, it is a rare employment benefits that makes government employment and at a reduced salary more attractice for highly qualified workers.  More on that in my next article.

Currently, 570 local government employers buy into VRS.  Before today, participating local governments were not required to make their employees pay 5% of their salary into VRS, but had the option to do so effective July 1, 2012.  However, only 38 of 570 units require pre-July 1, 2010 employees to contribute to VRS and no school boards require teachers to pay in.   As of today, only 122 of 570 local governments require post-7/1/10 employees to pay in.

The new legislation requires all participating local governments to have their employees pay in 5% starting July 1, 2012 and also give employees a 5% raise (for both pre and post 7/1/10 employees).  School boards are allowed to phase in this 5% requirement over five years. 

This bill does not have a fiscal impact on the state because it does not affect the amount of state money flowing in to VRS - only the source of the money (e.g. employees v. local governments).  However, it does have a significant impact on local governments (and employees) because it forces them to give a 5% raise this year or a raise phased in over five years.

 HB1130 (SB498) - The Hybrid Plan
Creates a new part-defined benefit, defined contribution plan.  All employees starting after July 1, 2014 would be required to participate and all existing employees would be given a one-time opportunity to make a one-time election to participate in the new plan. 

Employees would be required to contribute 1% of their pay to the defined contribution plan and can voluntarily contribute up to 5% of their pay.  The state would match contributions up to 3.5% on a schedule (See Page 8). 

The defined contribution plan would be vest in 20% increments over five years - this means if an employee separated from service they would forfeit employer matching contributions. 

It also creates a new disability plan for participating local employers - we were not given information on how that differs from the current system. 

The new defined benefit plan would have a 1.0 multiplier. 

These changes are expected to "save" $3.6 billion over the next twenty years assuming 80% of employees contribute the minimum and 20% contribute the maximum. Please note that 80% assumption - that is a key point I will address in my next column.

HB1130 - Changes to Existing Employees
The bill made a series of additional changes that applies to most current employees:
  • It lowers the retirement multiplier from 1.70 to 1.65 for future service.
  • It bases benefits on 60 months of service (high five) instead of 36 (high three).
  • It caps cost of living increases (COLA's) at 3%
  • The bill also defers COLAs for employees who retire with less than 20 years of service until much later in their retirement.
These changes are projected to "savings from the total fund" (General Fund + Non-General Funds) of $1.2 billion to $4.2 billion over two years depending on whether employees make minimum or maximum contributions (see here for tables). 

None of the provisions applied to vested employees or hazardous duty employees (law enforcement, firefighters & corrections employees).  Most of the changes apply to non-vested employees.  There is a chart of how the above applies between vested and non-vested employees on Page 6 (paragraph 11) of the Fiscal Impact Statement here.

Conclusion
These provisions basically completely rewrite the structure of the VRS.  They are major changes that will affect tens of thousands of people and their families.  Please note that this plan is currently on the Governor's Desk waiting for his signature, amendment, or veto.

In my next article, I will cover why I voted no on these bills.

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