Chicago on the James?

richmond_skylineby James A. Bacon

As if the City of Richmond didn’t have enough problems, now tensions are erupting between the executive director, board of trustees, and members of the city pension fund’s investment advisory committee. Based on the account by Michael Martz at the Richmond Times-Dispatch, the rancorous relations between pension director Leo F. Griffin and members of the investment advisory committee might have originated over policy but have now gotten personal.

The underlying issue appears to be over who should control the pension’s investment decisions. For years the investment advisory committee set policy in lieu of hiring a high-priced chief investment officer. But Griffin, who took on his post three years ago, allegedly has been working behind the committee’s back to assume control of rebalancing the system’s investment portfolio and making other investment decisions, while blocking the flow of information to committee members. In effect, Griffin is alleged to be changing the governance model of the pension fund without a serious discussion by the board.

Like most Richmonders, I had never heard of the Richmond Retirement System. I assumed that the Virginia Retirement System ran the city’s pensions. But, no, the city’s $540 million fund is responsible for paying the retirement benefits of nearly 10,000 retired and current city employees.

funding_progressThis fracas follows on the heels of a proposal by Richmond Mayor Dwight Jones earlier this week to raise taxes and borrow $580 million over the next ten years to fix the city’s derelict public school buildings and meet other capital needs approaching $1.5 billion. The two sets of issues are linked because, it turns out, city pensions are only 63.5% funded, and the unfunded liability amounts to $310 million. As seen in the “Schedule of Funding Progress,” the city has made only marginal progress during the past seven years of economic expansion to restore the pension to the fully funded position it had in 2000.

In reading the pension fund’s 2015 Comprehensive Annual Financial Report, I see that the pension fund could be even more fragile than it appears from those numbers. When calculating its unfunded liabilities, pension managers assume that the fund’s assets will generate an annualized rate of return of 7.5% over the long run. By contrast, the Virginia Retirement System assumes a “discount rate” of only 7.0%. Some pension observers say that, in an era of persistent, near-zero interest rates, the discount rate should be even lower.

The discount rate used by municipal pension funds has political ramifications. A higher rate assumes greater investment returns, which reduces the funds the City of Richmond has to contribute each year to support the pension. But if actual performance falls short, the city will have to increase its annual payout, much as the General Assembly has done in recent years to shore up state pensions.

Fiscally speaking, we live in perilous times. We fantasize that we’ll always be able to muddle along. Then along comes Puerto Rico, which shows how dysfunctional our political system can get when managing long-term debt. Closer to home we can observe the political turmoil created when Illinois and Chicago, a state and city with massive unfunded pension obligations, struggle to avoid becoming the next Puerto Rico.

The City of Richmond is an awesome place and, economically speaking, has more going for it than any time in 30 or 40 years. But weak finances may be its Achilles heel.

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7 responses to “Chicago on the James?

  1. well – they are not alone – but it still feels a little risky

    LOCALITIES NOT PARTICIPATING IN VRS

    http://www.vml.org/sites/default/files/APAListofLocalities.pdf

    short list:
    City of Charlottesville
    City of Danville
    City of Falls Church
    City of Norfolk
    City of Richmond
    City of Roanoke
    County of Arlington
    County of Fairfax
    Town of Farmville

    then another approx 40 smaller towns

    and if you GOOGLE:

    ” Moving Forward, Together VRS comprehensive financial report”

    you’ll see that most of Virginia municipalities, schools and authorities do participate in VRS:

    Participating Employers:
    Counties/Cities/Towns 255
    Special Authorities 199
    School Boards 144
    State Agencies 236
    Total Employers – 834

    of course -having the state doing that job is no guarantee of responsible policy –

    1. Illinois: 39% funded
    2. Kentucky: 44% funded
    3. Connecticut: 48% funded
    4. Alaska: 52% funded
    5. New Hampshire: 57% funded

    but it’s hard not to worry about Richmond – as they seem to have quite a few ongoing projects to spend money on – at the same time they have serious budget issues…with schools and pensions …

    • Good info, LarryG. Now, how did Richmond go from fully funded to 63% funded in 15 years, the past 7 of which were a period of market expansion? And how does Richmond’s track record over those 15 years compare with that of VRS?

  2. I think Virginia is about 72% and it has gradually improved from about 65% after action by the General Assembly.. although if someone knows better numbers.. there seem to be different ones on google searches so perhaps there are different ways to calculate the ratio…

    If Richmond was fully-funded at one point – they were one of very few I suspect since the norm seems to be quite a bit lower than that for many States and other municipal entities.

    There were are/were no guarantees with private industry on this issue either especially these days when companies come and go and get taken over and cannibalized .. smaller textile, furniture, local manufacturing – go belly up and pensions lucky to pay out pennies on the dollar.

    The govt – the Pension Benefit Guaranty Corp has taken over thousands of private sector pensions that companies walked away from. Many of those folks depend heavily on their Social Security.

    Give the Federal Govt CREDIT – in the late 1980’s they converted from a govt-funded pension to a 401K type pension for new employees where both the govt and the employee contributed but the pension is portable and in my view that’s what Virginia and Richmond should be doing – to both protect workers and taxpayers.

    the other bugaboo that most do not realize but all counties and cities in Va are now fully aware of – because of rule changes in GAAP – OPEB – another under-funded and til now – un-reported liability .

    ” GASB ( Governmental Accounting Standards Board) PUBLISHES NEW STANDARDS FOR REPORTING HEALTH INSURANCE AND OTHER RETIREE BENEFITS
    Norwalk, CT, June 29, 2015—The Governmental Accounting Standards Board (GASB) today published two Statements that intend to improve the accounting and financial reporting by state and local governments for postemployment benefits other than pensions (OPEB), primarily retiree health insurance. ”

    that’s right – not only pensions – but health care benefits are funded responsibilities of Richmond and other counties and cities in Va and from now on they must report these liabilities and funded levels.

    Finally – I’d be totally remiss if I did not also point out where these “rules” (that also apply to the private sector) actually do come from – the Government and the Private Sector:


    The GASB is not a government entity; instead, it is an operating component of the FAF, which is a private sector not-for-profit entity.

    Funding for the GASB comes primarily from an accounting support fee established under the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as the sale of certain publications.

    Its standards are not federal laws or regulations and the organization
    does not have enforcement authority.

    Compliance with GASB’s standards, however, is enforced through the laws
    of some individual states and through the audit process, when auditors
    render opinions on the fairness of financial statement presentations in
    conformity with GAAP.”

    Does Virginia require the localities to adopt these standards?

    you bet your bippy –

    ” The Code of Virginia requires each public employee retirement system to publish an annual report that contains financial statements prepared in accordance with GASB standards.

    GASB accounting standards No. 67 and No. 68 substantially change the accounting and financial reporting requirements for public pension systems. In addition, GASB has released standards for other post-employment benefits (OPEB), such as group life and retiree health insurance credit.”

    give credit where credit due – the Va Code does come from those General Assembly guys in Richmond…

    and without that code – we’d know a lot less about Richmond pension issues so give the govt credit – both the Feds and State for requiring localities to provide disclosure and be held accountable.

    The real question is – even after people know – would voters in Richmond (and other localities) throw out of office those who are not being financially responsible with their budgets?

  3. It’s important to clarify Fairfax County has multiple pensions for its employees: “regular” county employees; sworn police; other uniformed employees; and a second pension for teachers. Teachers participate in VRS. The second pension allows teachers to retire in their 50s and receive the equivalent of Social Security benefits till they become 62. All County pensions exceed what is required by state law. Health care benefits generally exceed what federal employees receive under their benefit plans.

    Many county teachers are complaining that they would rather have higher pay than more generous pensions. However, the School Board has done nothing to begin to move compensation from benefits to salary. Rather, it whines for more tax dollars. This is absurd because the School Board notes that, for many teachers in the Washington Area, pay FCPS pay lags. But when benefits are compared, FCPS is often at the top (just benefits not combined.)

  4. yup – listed in the ” VRS-Participating Employers ” is the Fairfax School system.

    I don’t think VRS is “one” pension plan though. I think it is specific to the employer and VRS is the custodian trustee.

    So you may well fine that richer jurisdictions have fatter pensions and poorer ones – less juicy.

    And its even more complex because teachers – and likely other types of employees can switch from one State/local employer to another and still stay vested in the VRS pension and I presume keep what they’ve already put in and then change the contribution formula to be what the new employer scheme is.

    Pensions and how secure and how generous they are – are the big divider for American workers and central to the discontent of those workers who do not get pensions, or get puny ones and ones that are not secure or portable.

    That’s the essential goal of those who are willing to go into deep debt to get a College Education – they are looking for a “good” job that has “benefits” – health care and a good pension – and those that don’t have a plan for college and that kind of job no longer can count on a blue-collar union job to give them some parity on pay and benefits.

    A whole generation of workers is now adrift on jobs with good “benefits” and pissed off about it.

    Every Uber driver you see – is a guy (or gal) who is on their own with pension and health care unless they have their own 401K and buy ObamaCare – if they have any left over after they pay their FICA taxes.

    More and more jobs are of this type – in the moderb economy and jobs like you see in Fairfax and Richmond are the last enclaves of the stereotypical 20th century job with “defined benefits” rather than your “defined” contributions – i.e. your own.

    • Larry, there is a third option – a combination defined benefits/defined contribution plan similar to the federal government’s FERS program.

      Public pension and other retirement benefits costs are choking out other government functions and programs. There needs to be reforms and soon. And it seems almost obscene to insist people in the private sector who have no traditional pensions pay higher and higher taxes to fund traditional pensions for public employees.

  5. @TMT – You are right. The Feds have a 3-legged stool of pension, 401 and SS and they match dollar for dollar to some level for the 401.. I think..

    and we agree that public pensions have to be reformed although govt is not like companies that go away – the govt is forever.

    And it’s not like people can’t do self-directed IRAs.

    so what’s the solution?

    employer-provided plans are a form of mandated savings for retirement whereas that level of discipline is that forced by the govt beyond SS yet as people get old – if they lack resources – who pays – taxpayers – right?

    so which is the right answer? mandated IRAs or just let taxpayers pay for those who did not save? That’s exactly what happens right now with Medical care and nursing homes.. for the elderly – it’s more than 1/3 of MedicAid.

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