How Much Have We Lost?

Tuesday, March 20, 2012

VRS Changes Part III: Why I Voted No

On Sunday and Monday, I wrote about the changes that the General Assembly passed regarding the Virginia Retirement System on the last day of the 2011 Regular Session.  You can read those articles here:


When this bill was debated on the floor, I spoke out based upon what I knew at the time.  Here are my remarks.


Now that the fiscal impact statements are out, I have had a chance to think about it further.  I continue to this this was bad legislation.  The short version is:
  1. This cuts teacher and state worker compensation.
  2. This cuts benefits to current employees.
  3. It is an unfunded mandate on localities.
  4. It shifts investment risk to employees from the public.
  5. It undermines recruitment and retention of state workers.
  6. There was no transparency, sunlight or citizen input in the legislation.
I have set forth my explanation of these reasons in more detail below.

Problem #1 - Cutting Teacher and State Worker Compensation
First, while you will hear most proponents say that these "reforms" will "bring VRS into balance," "restore solvency to the VRS," or "generate long-term savings," what this really does is cut teacher and state employee compensation.  You cannot cut something or "save" money without taking it from someone else.  These reforms "save money" by reducing the disposable income of teachers and other state workers (not police, firefighters or correctional employees) over twenty years and putting it into VRS instead of employees' bank accounts - contrary to what they were promised when hired or as is the current practice.

The Fiscal Impact Statements accompanying this legislation indicates that a little over half of the savings in VRS will come from teachers.  This runs against what most people want to see in our education system.  In my recent constituent survey, I asked my constituents their priorities for improving our education system.  The number one priority was improving teacher salaries - this cuts teacher salaries and is probably the single largest cut to secondary education in the history of Virginia.

Problem #2 - Cutting Benefits of Current Employees
Second, I believe in keeping promises we have made to workers.  When people choose a job or a career, they make that choice in-part premises upon a certain benefit package.  Families plan their other spouse's career, decisions about children, spending, college, and life around those benefit structures.  To change the deal on employees once they have made a commitment, is just wrong.

This legislation changes the multiplier for employees who are not vested as of July 1, 2013.  It changes the retirement calculation from high-five to high-three for employees who are not vested as of July 1, 2013.  It caps COLAs at 3% for all employees hired after July 1, 2010 or not vested as of July 1, 2013.

I find this to be especially troublesome because the workers whose plans are being changed are not the ones who created this mess - it was the legislature.  They shouldn't be the ones that pay for it. 

If you make a deal, you should stick with it.  This is a breach of faith.

Problem #3 - Unfunded Mandate to Localities
Third, this legislation requires localities to force their employees to contribute 5% and give the employees a 5% raise to most cover this contribution.  No school boards are doing this now and few local governments are.

Fairfax County's initial estimate is that this will cost the County $15 million per year and that is only incidental benefit costs, not salary increases (e.g. employer share of VRS, employer side of FICA, and life insurance).  The state will not be providing any extra money to make up for that.

Fairfax County Public Schools' payroll is approximately $2.1 billion dollars.  A 5% increase is approximately $110 million dollars per year of state mandated additional payroll costs going into VRS instead of into Fairfax County teachers' take home pay. 

Moreover, once the salary base goes up and the state rebenchmarks education costs across the state in 2014, the state will then be forced to compensate for this additional compensation on an ongoing basis. 

Extrapolate this across the entire state - this involves real money and nearly all of it not paid by state government, but by local government and thus property taxes
  
Problem #4 - Shifts Investment Risk to Employees
Fourth, 401(k)-style defined contribution plans shift the risk of a stock market crash to employees and away from the government.  It is easier for a group to survive an event like that rather than leave individuals subject to market crashes to make up for lost time by working longer, getting second jobs, or tapping non-existent savings.  Defined benefit pensions provide people with stable and reliable benefits so they can plan their lives and avoid the shock of ups and downs in the economy. 

Also, history has shown that when given a choice, people tend to take salary up front instead of saving for a retirement.  Defined benefit pensions force savings which otherwise would not occur.  They are better retirement vehicles - provided that they are funded properly.  A defined benefit pension provides financial security to workers and is a real recruitment tool. 

Moreover, the decision to cap cost-of-living increases at 3% leaves retirees subject to significant risk if inflation exceeds 3% - effectively shrinking their benefit.  While inflation has not been over 3% in 20 years, it could always come back.  The correct place to put the risk of inflation is upon the government, not upon individual retirees.

Problem #5 - Undermines Recruitment and Retention
Fifth, defined benefit pensions have numerous benefits.  Numerous studies have shown that the long-term teachers are the most effective.  New teachers the least.  Defined benefit pensions incentivize employees to stick with their career until they are fully vested (25 years).  This creates a higher quality educational environment for our children. 

This is also why the U.S. Military has a defined benefit pension.  It incentivizes soldiers to put in 20 years.  Without it, the most experienced, highly-talented, and well-qualified officers would be picked off into the private sector before they serve their full twenty years.  The same thing is true for state employees. 

Compared to other states which require employees to pay in 5% of their pay, the existing pension system provides Virginia's schools with a valulable recruitment tool and competitive advantage over other systems. 

A stable and reliable pension also provides workers with the financial security necessary to justify asking them to accept lower paying employment.  If you move to "private sector-type" retirement benefits, then we need to be prepared to pay private sector wages.  If we are not going to do that, our children and taxpayers will be on the losing end of the competition for our society's most talented.  The quality of education will suffer. 

Problem #6 - Lack of Transparency, Sunlight, or Citizen Input
Finally, the process by which this legislation was written was flawed.  While it is true that this legislation was introduced and was out there for over a month - few people had any idea that discussions were actually occurring regarding changes to the benefits package.  Pension reform legislation was introduced last session and went nowhere. 

The final bill language was delivered to the bodies at around 5:00 and 6:00 p.m. on the last day of session.  When I was handed the 90-page bill, it was still warm.  The only information we were given before voting was a six page Powerpoint and an opportunity to ask questions.  The Fiscal Impact Statements on the bills that explain the fiscal impact came out on March 16, 2012 - six days after we voted.

None of the 570 political units this affected were given an opportunity to provide feedback on the final version.  None of the groups representing employees in the state were allowed an opportunity for input on the final legislation.  No third parties had an opportunity for input.  Taxpayers had no opportunity for input. 

While I can appreciate that some were worried about the amount of political pressure that might be felt by telling workers what we were doing to their pensions, this is not the right way make policy in a democracy.  Especially, on a decision that has billions of dollars of impact on thousands of people and their families.

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