When the editorial writers and talking heads speak of the looming retirement crisis in state government, they usually are referring to massive unfunded pension liabilities. This is a major concern and should by no means be underestimated. But the problem is actually bigger than pensions. Most of the 50 states have what’s known in actuary speak as “Other Post-Employment Benefits” (OPEB) such as life and health insurance. Until the Government Accounting Standards Board issued standards in 2004 requiring full disclosure, state governments rarely revealed these obligations.
In Virginia, those liabilities total $5 billion, according to the “Report of the State Budget Crisis Task Force.” That’s on top of $22 billion in the unfunded state employee pension liabilities that have been widely discussed, debated and legislated.
Unlike some states, Virginia moved aggressively this year to deal with its pension liabilities: (1) requiring teachers and local government employees to pay 4% of their salary toward their defined benefit plans with a 1% match from their employers, (2) establishing a mandatory 401(k)-style retirement plan for most employees (3) reducing Cost of Living adjustments for employees with less than five years of service, and (4) requiring the state to contribute funds at rates certified by the Virginia Retirement System Board of Trustees over the next three biennial budgets.
Moody’s Investment Service estimated that the reforms would lower total unfunded liabilities for state and local employee plans by nearly $9 billion by 2031.
Wow, all those changes, and Virginia shaved only $9 billion off its future liabilities? That still leaves $13 billion — just for the pension — that someone else has to tackle. Either employees will have to chip in more… or taxpayers will.
Then there’s the issue of unfunded OPEB benefits, or health care insurance for retirees. The good news is that Virginia’s liability is much smaller on a per capita basis than the other five states surveyed in the Task Force report. Our $5 billion liability compares to $137 billion for California and $196 billion for New York. Even taking their larger populations into account, that’s a giant load. States the report:
Most governments fund these benefits on a pay-as-you-go basis rather than contributing to a funded plan. They compute an ARC [Annual Retirement Contribution] and report it in their financial statements but generally ignore it for budget purposes, simply paying actual benefits for current retirees. Virginia is an important exception: It has a partially funded plan and until recently contributed the ARC.
Some unknown and unappreciated legislator or state administrator deserves credit for committing that act of fiscal responsibility. While a $5 billion liability is still a lot of money, especially when combined with the unfunded pension liability, but it’s manageable. California and New York, by contrast, are dead men walking.
Bacon’s bottom line: Virginia has been markedly more responsible in dealing with its long-term retirement obligations than many other states, but that’s a really low standard. Based upon the Task Force’s numbers, we still face $18 billion in retirement benefit shortfalls over the coming decades. The retirement of the Baby Boomer generation from the state workforce will be painful to finance.
Special thanks to criminal defense lawyer Thomas Soldan for supporting Bacon’s Rebellion.