Boomergeddon in Virginia: Retirement Benefits

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.

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  1. after we get things “fixed”, the answer surely will be that since we live longer than we used to – that we need to work longer than we used to OR if we are going to live longer in retirement, we will have to set aside more money than we used to, leaving less to live on before retirement.

    we are living higher on the hog than we can afford to given our increasing longevity.

    we have to choose. so far we have refused to even accept the reality that our SS, our Medicare and our pensions plans – corporate, public and private were predicated on a flawed idea that actuarials and demographics would not change.

    It was dumb but it was unanimous and now we have to re-set ourselves to what the reality is.

    it’s not helpful that neither political party has the guts to deal honestly with the issue and wants to use it as a club on the opposing party.

  2. DJRippert Avatar

    “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,”.

    Translation: The Imperial Clown Show in Richmond used it’s excessive Dillon Rule power to run the pension fund for even local employees like teachers. The ICSiR then botched the finances and found itself in a deep hole. So, the ICSiR dumped a big part of the problem back on the employees (perhaps somewhat fair) and the localities (an unfair unfunded mandate).

    This is classic Clown Show – screw something up then tell the localities to magically find the money the pay for the Clown Show’s screw up.

    Richmond is THE problem.

  3. geeze DJ – the unfunded pension conundrum is pretty much national in scope for both public and private pensions.

    The Feds dumped defined contribution pensions a while ago and many corporations have also but just because people themselves own their own pensions has not really changed the forces that affect them – actuarials and demographics, and investments performance.

    And I don’t see Va in any worse condition that most other states either,

    this whole blame thing (and I include all gloom/doom perspectives here), wants to find someone or some thing to blame what really is actuarials, demographics and investment performance on.

    You blame Richmond, Others blame …people like teachers …or the retired.

    we got to get past the blame and take responsibility for fixing things which is going to require each of us to take some hits in some form or other – no question about it,

    but this blame thing is not working….

    Erskine Bowles makes this point in WAPO this morning:

    ” This year, our broken tax code will give away more in loopholes — $1.3 trillion — than it collects in income taxes. That’s nuts, …”

    the govt needs to claw back those loopholes and the rest of us need to reconcile the simple fact that we live longer that we used to and there are a lot more of us trying to live on the same amount of money.

  4. Neil Haner Avatar
    Neil Haner

    Virginia is very lucky in that there isn’t a powerful teacher’s union to fight. Not to get all Scott Walker up on this blog, but the very difficult salary and benefit modifications (cuts?) have been enabled by the state and localities’ ability to push them through the first time around. Yes, teachers, citizens, and the press may decry it from time to time, but they’ve been necessary, and will continue to be necessary, and we’re lucky the unions haven’t been around to politicize and drag out the fight.

    I’m worried, but not too worried. Virginians have the guts to make another round of cuts or restructuring if necessary, and combined with some better tax revenues as the economy continues to creep back up, we’ll work back towards a balance before too long.

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