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The board overseeing the retirement system said the costs are roughly on par with expectations.
Thursday, October 17, 2013
The Virginia Retirement System has prepared a big bill for lawmakers who have pledged to stop under funding pensions for state employees and teachers.
The VRS board of trustees is expected to approve pension contribution rates today that will cost the state an additional $320 million over the next two years and an undetermined amount for local school divisions for their share of teacher retirement obligations.
The estimate, first given to lawmakers in July by VRS Director Robert Schultze, has been confirmed by an actuarial study that recommends an increase of about 3.5 percent of pay for state employee pensions and almost 3 percent for teacher retirement just to cover 80 percent of the system’s long-term liabilities.
“I think we are still in the same ballpark,” Schultze said Wednesday after the contribution rates were endorsed by the board’s benefits and actuarial committee.
Currently, the state is paying about 70 percent of the pension contributions required by VRS, but Gov. Bob McDonnell and the General Assembly agreed last year to require the state to gradually increase its contributions to 100 percent of the requirement in six years.
“We were well aware it was going to be a significant number when we agreed to the reforms,” said Del. Chris Jones, R-Suffolk, chairman of the House Appropriations subcommittee on compensation and retirement. “We’re not surprised at all.”
The amounts required by the $58 billion pension system would have been higher, but VRS made changes earlier this year to its assumptions about state employee and teacher pay, retirement plans and mortality rates.
As a result, the funded status of the pension plans stayed roughly the same — and increased slightly for some of the smaller plans, serving state police and other sworn law officers such as game wardens and correctional officers.
The plans remain under-funded, based on the assets available to pay long-term unfunded liabilities. The state employee plan, with about $7.4 billion in unfunded liabilities, has a funded status of 65.1 percent. The teacher plan, with $15 billion in unfunded liabilities, has a funded status of 62.1 percent.
Ideally, the plans should be at least 80 percent funded, but the retirement system is still recovering from the stock market crash and recession, which slashed the value of its investments almost 22 percent in 2009.
The new study shows the effects of the crash to be receding. For the first time since 2007, the market value of VRS assets is higher for all plans than their actuarial worth. The actuarial worth of assets has been higher because it reflects a smoothing of both market losses and gains over five years to reduce volatile rate swings.
This year, the actuarial value of VRS assets still includes about $1.2 billion in investment losses from 2009. Those losses will be dropped from the valuation next year.
“This is the last year we have to reflect a piece of that [in rates],” said Jose Fernandez, principal actuary for VRS and its consulting firm, Cavanaugh Macdonald, which prepared the new study based on system assets and obligations as of June 30.
Pressure on contribution rates also is expected to ease as new employees enter the public work force with reduced pension benefits under reforms enacted in 2010 and again last year.
However, the new hybrid retirement program adopted last year for state and local employees won’t begin applying to new hires until Jan. 1.
The law that imposed the hybrid — a combination of limited pension benefits and a 401(k)-style contribution plan — also requires the state to fully fund its share of pension plans by the fiscal year that begins in mid-2018.
The requirement increases the state’s funding requirement from roughly 70 percent to 80 percent of the VRS certified rates in the next two years and then to 90 percent in the following biennium. If the state backs off the commitment, it will face much higher funding requirements under new national accounting standards.
“The state has underfunded VRS so much that they had to pass a law so they could partially fund it,” said Henrico County Manager John Vithoulkas, who expects a significant increase in the share of teacher pensions.
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