I wouldn’t want to be Gov. Tim Kaine at the moment. He has the unenviable job of chopping $1.3 billion out of next year’s budget. There are no easy choices, and there is no way to avoid making a lot of people unhappy.
Kaine summarized his major initiatives in a press release you can read here. Most of the savings look real, and I applaud him for making them. But I would draw attention to one very dangerous item on Kaine’s list of “savings”: He proposes cutting Virginia Retirement System contributions by $104 million. Reducing payments to an already under-funded pension plan puts Virginia on a very slippery slope that may prove impossible to climb back up.
A week before Kaine announced his budget cuts, the VRS issued a press release announcing that the retirement fund had experienced a -21.1% return on its investments in FY 2009. What the VRS did not release at the time was the extent to which its two funds, which cover state employees and public school teachers, were actuarially deficient. Indeed, that seems to be information that VRS is not eager for the public to know about, for you cannot find its most recent actuarial valuation, performced in 2007, anywhere on its web site.
However, the Virginia Government Finance Officers Association did post a 2007 presentation by Barry Faison, CFO of the VRS, entitled, “Virginia Retirement System — Where We Are and Where We’re Going” online. Slide 15 (from which the graph above is taken) and Slide 16 show the funding status for the State Employee and the Teacher retirement funds.
Once upon a time, as recently as 2001, according to Faison’s data, both were fully funded. No longer. As of FY 2007, state employees were only 83% funded and school teachers 76%. Since then, the VRS has experienced a -4.4% return in FY 2008 and a -21.1% return in FY 2009. Clearly, the VRS is significantly more under-funded now than it was in 2007. Perhaps it is time for another valuation.
Kaine’s press release implies that there’s no problem. States the press release: “Contribution rates for the Commonwealth and its employees will be changed in July at the beginning of the next biennium to adequately fund the long-term needs of the retirement system.”
Oh, really? Presumably, that means Virginia will be increasing payments in the next biennium — and/or state employees will see bigger deductions from their paychecks. How big will the changes be? And will they really restore the financial integrity of the VRS? I expect this issue will get a lot of attention in the upcoming session of the General Assembly.
Update: Jim Nolan with the Times-Dispatch reports today that Kaine is, in fact, considering the idea of making the state’s 100,000 employees contribute more to the VRS. Currently, the state contributes 6.26% of each worker’s salary into the VRS; the percentage varies with each budget cycle. Virginia is one of only five states that do not require workers to contribute. Writes Nolan:
Robert P. Schultze, director of the VRS, said preliminary internal estimates suggest the system will need increased contributions of 4 percent to 6 percent of the current payroll to fund pension liabilities over the next 20 to 30 years that maintain the current level of benefits for future retirees.
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