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Lawmakers ignored their own actuaries and underfunded the retirement system for years. It’s time to shape up.
Monday, July 15, 2013
The state’s pension chief sounded a lot like nice-guy Bob Harper from the TV show “The Biggest Loser” last week when he coaxed state lawmakers to follow the schedule they have adopted for returning the retirement fund to good health after years of neglect.
“It will be important to stick with the plan,” Virginia Retirement System Director Robert Schultze told legislators, according to the Richmond Times-Dispatch.
Sticking with the plan will be harder than eating more broccoli and hitting the treadmill. Legislators will have to cough up an extra $320 million in the next two-year budget to stay on track for reaching the ultimate goal: a fully funded pension plan in the budget that begins July 1, 2018.
There are 169,400 retirees now covered by the pension. Another 341,700 state government workers, teachers and municipal employees are still on the job. Cities, counties and towns that participate in VRS are required by law to pay the amount recommended by state actuaries to meet obligations for their own workers. Lawmakers, however, have been allowed to ignore the actuaries. A 2008 study found that the General Assembly made smaller contributions than the VRS board advised in 10 of the previous 18 years, including years when revenues were flush.
When the recession hit, bad habits turned into self-destructive behavior. In the previous two-year budget, legislators contributed only about a third of the amount needed to cover future obligations, putting off $620 million in payments.
The current budget shows substantial improvement, with payments at more than two-thirds of recommended levels, but lawmakers continue to fudge. For example, they assume that investments will generate an 8 percent return even though VRS predicts only a 7 percent average return. Today’s rose-colored glasses will smudge up future budgets if the volatile market lets them down.
The pension fund for state workers is projected to be 62.9 percent funded this year, and the teachers’ plan is anticipated to be 60.2 percent funded. Reduced benefits for future retirees will take some of the pressure off of the legislature, but not for another eight to 10 years. Before then, legislators will face another pension dilemma.
New accounting rules require that $15 billion in unfunded liabilities for the teachers’ retirement plan must be counted on the ledgers of local governments unless legislators volunteer to shoulder part of those obligations. That would be the fair thing to do, given the fact that the pension has been damaged by fickle legislators. Even localities like Roanoke that operate their own pensions will be affected because teachers are still covered by VRS. In some cases, municipal credit ratings could be downgraded because of the liabilities.
Credit rating agencies also are eyeballing the state’s pension decisions, the VRS’s Schultze warned legislators, a reminder that Moody’s Investors Service can make butt-kicking personal trainer Jillian Michaels look like a push-over.
If lawmakers ignore his advice and their own self-improvement plan, state workers, teachers and taxpayers will all be big losers.
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