Category Archives: Government workers and pensions

How to Look Fiscally Responsible While Being Fiscally Irresponsible

Posted on January 13, 2019 by | 8 comments

Governor Ralph Northam wants to boost the retiree health credit for state police, law officers, sheriffs and their deputies. He has included $8.1 million in his proposed FY 2020 budget to pay for a $2-per-year of service increase for state police and a $1.50- to $5-per year increase for sheriffs and deputies.

While the increase in benefits will be paid for, it legislative hearings have revealed how poorly these retirement plans are funded to begin with. Northam’s proposal would add $76 million in liabilities to two plans that are funded at less than 10% of their long-term obligations. House Appropriations Chairman Chris Jones, R-Suffolk, called the benefit increases “fiscally irresponsible.” Continue reading →

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Fairfax Supervisors Face County’s Monster Pension Crunch

Posted on December 2, 2018 by | 27 comments

Fairfax County Board of Supervisors Chair Sharon Bulova

Once upon a time, way back in the year 2000, Fairfax County’s general-employee pension plan was amply funded at 109% of projected needs. But the funding ratio dropped severely during the last recession and has been hovering around 70% in recent years. Today unfunded pension liabilities for Virginia’s largest local government are roughly comparable in size to that of the Virginia Retirement System, which which state employees and many local government employees participate.

Taxpayer groups are sounding the alarm and, astonishingly, the Board of Supervisors is actually studying proposals to address the shortfall.

County officials have proposed a range of tweaks to the pension plans for public safety workers and general employees. (School teachers have their own plans not controlled by the county board.) Among the changes: The minimum retirement age would be bumped from 55 to 60, the retirement-eligibility formula would increase age + years served from 85 to 90, and the final salary-averaging period for calculating retirement-payments would be increased from three to five. The changes would apply only to new employees hired on or after July 1, 2019, reports Inside NoVa.

Said Board Chair Sharon Bulova (D): “The Board, all of us, have felt this is a contractual, really, issue. If you joined the county under certain expectations and you’ve based your retirement plans on what you believed would be the deal when you came to the county, we are not changing that for current employees.”

Sean Corcoran, president of the Fairfax Coalition of Police Local 5000 described the proposed pension changes as “a completely contrived crisis.” Others speaking for county employees warned that the plan would create a new class of “second-class employee” and would hurt morale and recruitment.

But taxpayer advocates said the proposed reforms were just a start.

Arthur Purves, president of the Fairfax County Taxpayers Alliance, said while the county’s population increased 20 percent since 2000, inflation-adjusted salaries for county employees rose 35 percent, health-insurance payments went up 194 percent and pension costs increased 244 percent.

County real estate taxes since 2000 have increased three or four times more than the inflation rate, said Purves, who blamed compensation increases as the culprit.

The proposed pension cuts for new employees “are only a small and necessary start,” he said. “You need to look at raises.”

McLean Citizens Association president Dale Stein said county pension borrowing went up $600 million during the last three years and added officials were basing their calculations on average annual returns on investment of 7.25 percent, while returns over the past decade averaged just 5.9 percent.

“We strongly urge the Board of Supervisors to ensure a strong, competitive compensation package for all county employees,” Stein said. “In making those packages possible, the realistic question is, ‘Where in the heck is that money going to come from?'”

The Inside NoVa article did not say how much the proposed changes would reduce the unfunded liabilities.

Bacon’s bottom line: You can keeping kicking the can down the road but eventually you run out of road. The time to act is now. Relatively small changes today can fix a problem that is still a couple of decades away from a full-blown crisis. Failure to enact reforms, however, will make necessary changes all the more painful in future years.

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Virginia Unfunded Liabilities: $5.4 Billion

Posted on October 24, 2018 by | 15 comments

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

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A Thoughtful Reminder of Another Pension Landmine

Posted on October 5, 2018 by | 13 comments

A recurring theme of Bacon’s Rebellion is that billions of dollars of liabilities lurk in the balance sheets of Virginia’s state/local government and quasi-governmental organizations — from the $20 billion unfunded pension liability of the Virginia Retirement System to the $3.5 billion unfunded pension liability of the Washington Metro system. Some don’t get the attention they deserve. As I come across new examples, I’ll bring them to your attention…

Like Fairfax County’s $5.6 billion pension liability. According to the Fairfax County Taxpayers Association (FCTA) Watchdog Report:

The Fairfax County pension liability is now $5.6 billion. … There are 400,000 homes in Fairfax County, so the liability amounts to $14,000 per household. To pay the liability will require an increase in the real estate tax of $1,000 for 14 years. The liability and the real estate tax will increase unless the retirement age is increased to 65 or 70 years of age — as compared to the current 55 to 60. Without such a change, the liability per household will get worse in the future because the number of county and school employees has been increasing 1.6% per year while the population has been increasing only 0.9% per year.

The debt bomb is worse than you think. Much worse.

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Virginia’s Highest-Paid State Employees

Posted on October 1, 2018 by | 2 comments

Charles Phlegar: Virginia’s highest paid state employee in 2017,

The Washington Business Journal has just published its database of the highest paid state employees in Virginia, and the list is dominated by people you never voted for, or in many cases people you’ve never even heard of. For the most part, the highest-paid state employees work for colleges and universities — not just any old college and university, but Virginia’s elite schools and research institutions.

Charles D. Phlegar tops the list, making $661,700.00 in 2017. Phlegar is vice president for Virginia Tech’s department of advancement, which means he runs the all-important fund-raising operations. He made more money than Virginia Tech President Timothy Sands, who raked in a salary of $527,850. (These numbers do not include non-salaried perks such as presidential residences, cars, and flunkies.)

At the University of Virginia, David S. Wilkes, dean of the school of medicine, snagged the top spot at an even $600,000. He beat out President Teresa Sullivan at $580,000. Other top earners at UVa included Jayakrishna Ambati ($590,400), a research scientist who may have discovered a cure for macular degeneration, and Irving L. Kron ($561,100), chair of the Department of Surgery who has since taken a top spot at the University of Arizona. 

Ambati and Kron illustrate the hyper-competition for top research talent. Ambati joined UVa in 2016 after directing the Kentucky Eye Institute in Lexington, Ky., while Kron departed from Charlottesville, where he had lived many years, to become Interim Executive Dean at the University of Arizona College of Medicine.

For point of reference, Governor Ralph Northam is paid a salary of $175,000 yearly. But he does get cool perks like free rent in the Governor’s Mansion and a contingent of state police guards.

A major difference between Virginia’s research universities and everyone else is that the research universities can tap endowments and other sources of funds to supplement state salaries. Thus, UVa’s Sullivan was paid $197,620 in state salary p;us $362.210 in non-state salary. Adding up the salaries for the 148 highest-compensated administrators, coaches and professors at UVa, I found that they collectively earned $39 million in state salaries supplemented by $10.8 million in non-state salaries. Contrast that to a small, liberal arts institution like (to pick one at random) Longwood University. Of the 25 highest-paid administrators and profs, only one — President W. Taylor Revely — had his $154,000 state salary supplemented by outside funds.

Among state employees, competition is the most intense for university executives who can either (1) bring in lots of outside money, and (2) win football and basketball games (which translates into bringing in outside money, just in a different way). So, someone like economics professor Kenneth Elzinga, one of the most popular lecturers and teachers in the history of UVa, makes a handsome salary of $238,000 but doesn’t make a dime in supplementary salary.

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Is Lower Pay for Federal Workers a Good Thing or Bad Thing for Virginia?

Posted on September 3, 2018 by | 8 comments

It’s no surprise that Barbara Comstock, the Republican congresswoman running a super-competitive re-election bid in Northern Virginia, has expressed her opposition to President Trump’s public ruminations that maybe he should cancel a 2.1% pay raise for federal government employees. After all, her district is chock full of federal employees, and she had distanced herself from the president already, so she had little to lose.

But when Republican Corey Stewart, who has campaigned on the gubernatorial platform that he is Trumpier than Trump, differs with the president, that is news.

At the end of the day, one can predict that political considerations will prevail. This is a policy blog, not a politics blog, so I won’t waste readers’ time delivering an inexpert opinion on the political fallout. More interesting to me are the policy implications.

For Virginians wanting what is in the parochial best interest of Virginians, the easy answer is to say that canceling the pay raise would be a bad thing. It would have a materially negative impact on incomes and economic output in Northern Virginia, the economic locomotive of Virginia’s economy.

But there are subtler considerations. The Northern Virginia unemployment rate now is 2.7%. That qualifies as a labor shortage. The Wall Street Journal recently observed that cutting pay would create a win-win for the economy if a significant percentage of federal workers decided to quit their jobs and work in the private sector. First, the pay-raise cancellation would cut deficit spending by tens of billions of dollars. Second, it would help relieve the labor shortage in places like Northern Virginia.

That makes sense in the abstract. But here’s the trick: Do the federal employees most likely to quit have the skills in demand in NoVa’s tech-heavy private sector? Employees trained in IT probably likely would find it easiest to make the switch. But they may represent the only government employees that private-sector employees actually want. The complacent organizational culture of the federal government does not inculcate the attitudes that entrepreneurial tech companies are looking for.

Another concern: If the federal government’s IT employees depart, will the functioning of the IT infrastructure be impaired? Federal IT systems are not exactly models of efficiency and cyber-security to begin with. Are we prepared for federal IT systems to get worse?

Yet another way to frame the issue: Would the departure of a deputy assistant under Secretary of Agriculture be noticed by anyone or impair the functioning of government? Conversely, is there anyone in the private sector who would want to employ a deputy assistant under Secretary of Agriculture?

Cutting through the thicket of questions with no obvious answers, I would suggest that one issue should move to the forefront for Virginians: Will cancelling the pay raise ultimately advance the goal of diversifying Northern Virginia’s economy? Would such a move stimulate the expansion of NoVa’s private sector? Virginians should back any measure that emancipates NoVa from federal spending.

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Posted in Economy, Government workers and pensions

Unfunded Pension Liabilities a Benefits Problem, Not Just a Funding Problem

Posted on July 23, 2018 by | 11 comments

Source: Wirepoints, based on Pew Charitable Trust

In the analysis of unfunded state pension liabilities, there are two main components: assets and liabilities. Here in Virginia, most attention is focused on the asset side of the equation — how much money have state and local governments set aside to pay for retiree benefits, and how well is the Virginia Retirement System managing the pension portfolio? Less attention is given to the benefit side — how rapidly are the liabilities increasing?

Wirepoints, a group that provides research and commentary on Illinois’ economy and government, has published a research paper arguing that the Prairie State’s massive pension liabilities are not the result of insufficient funding — asset growth has increased at an annualized rate of 5.9% from 2003 to 2015 — but of runaway increases in pension benefits of 7.5% annually. The difference: a 2.6% gap.

Many other states, including Virginia, have experienced the same problem of mismatched growth rates for assets and liabilities, though not to the same degree. Over the same 12-year period, Virginia’s pension benefits increased at a compounded annual rate of 6.3% while its assets increased by 4.2% annually. The difference: a 2.1% gap.

A few years ago, the increase in pension liabilities became a concern. Under pension reforms enacted during the McDonnell administration, state employees hired in 2014 or after were enrolled in hybrid pension plans, which combine a defined benefit plan with a defined contribution plan and an option for voluntary contributions. In essence the new package shifted some risk for funding retirement benefits from the state to the employees.

Thanks to the bull market in equities, Virginia’s asset performance has been stronger the past few years, and presumably the shift to a hybrid pension system has dampened the growth rate in pension benefits (and will continue to do so over time). Wirepoints’ numbers, based upon Pew Charitable Trusts data, goes only to 2015. More recent numbers might show more favorable trend lines.

Bacon’s bottom line: Growth in pension liabilities is one of the Virginia Retirement System metrics we should be watching. The onus for ensuring that the Commonwealth meets its pension obligations should not fall solely upon taxpayers and VRS portfolio managers. The state needs to keep pension costs under control, too. Legislators should check periodically to see if the hybrid pension plan is working as advertised.

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State Employees Not Funding Own Retirement

News - Posted on July 9, 2018 by | 8 comments

Source: VRS Report to JLARC

State and local employees, like many of their peers in the private sector, are declining in droves to contribute to their own retirement plans, despite the availability of matching funds, a.k.a. free money which compounds for decades.

The Virginia Retirement System has been putting new hires into a hybrid retirement plan that combines a defined benefit with a defined contribution plan which depends on employee contributions. More than 85,000 active workers are now part of the hybrid plan, but only 18 percent of those are socking away the maximum 4 percent of their pay, which is matched with another 2.5 percent by the state.

Of the rest, 42 percent are contributing nothing, and 36 percent are contributing  only one-half of one percent, or $50 per $10,000.  Most of those are apparently doing so because the state automatically escalated all contribution rates by one-half of one percent on January 1, 2017 and employees had to then intentionally opt out.

The information was part of the annual report on VRS to the Joint Legislative Audit and Review Commission Monday, covering all aspects of an operation vital to 700,000 participants or beneficiaries.  JLARC was presented with a brief oversight, a longer and more detailed overview, and the report of an outside actuary.

Since that first “automatic escalation” the participation has been dropping and it may continue to drop until a second auto-escalation is planned for 2020.  “Current low rates of voluntary contribution by hybrid plan members will result in lower retirement income,” the presentation slide states.   That’s a major understatement, but the hybrid plan and the low participation are saving the taxpayers a bundle in the short run and will save even more as the previous defined benefits plans fade away.

As of March 1, the overall year to date return was 9.9 percent, slightly behind the goal of 10.0.  No figure was given for the end of the fiscal year on June 30 and the last 90 days have been a trade fear-induced roller coaster.  The long-term return baked into VRS funding assumptions is 7 percent.  The five-year average has been 8.1 percent and the 25-year average 8.2, but as the saying goes, past results are not a guarantee.

The charts tracking the funding status of the various individual retirement plans were all inching up and the average overall is now about 77 percent.  Under current assumptions it will take 26 more years to get back to 100 percent funded, where the state was as recently as 2002.  The key phrase there is “current assumptions.”

“VRS is actuarially sound” concluded Lance Weiss of Gabriel, Roeder, Smith and Co. (GRS), the outside auditor.  He praised Virginia for setting that 7 percent target return a few years back, but then reported it is no longer a conservative assumption but merely a reasonable one.  Many of their clients are moving to 6.75 percent, he said.  A figure below 6.5 percent was hinted at.  With an aging workforce looking at starting benefits in the short term, there is even more reason for Virginia to rethink that 7 percent assumption on return.

The assumption on return is what drives the size of employer contributions.  In another report it was noted that if the two largest funds, those for teachers and for general state employees, moved to a 6.75 percent “discount rate” the state would need to increase its annual contribution by $182 million.  Changing that assumption also drives up the unfunded liability on both funds and pushes the 100 percent funded goal further out.

The reports today were merely accepted, with few hard (or easy) questions. It may take a longer period of market uneasiness to undermine the current return assumptions, but House Appropriations Chairman S. Chris Jones told reporters after the meeting he would consider it.

Senate Finance Co-Chair Thomas Norment did ask out loud if the hybrid plan was “worth keeping” but the question received no response.  The defined benefit plan is gone and unless participation patterns change future VRS retirees (86 percent of whom remain in Virginia) will not have the same comfortable income as current retirees.

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State Pension Problems Still Getting Worse

Posted on April 13, 2018 by | 29 comments

Map credit: Pew Charitable Trusts

Another year, and another analysis by the Pew Charitable Trusts on the deteriorating condition of U.S. states’ public employee pension plans. Drawing on data from 2016, Pew concludes that despite scattered actions by the 50 states to shore up their pensions, the funding gap only got worse.

In 2016, the state pension funds in this study cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015 and the 15th annual increase in pension debt since 2000. Overall, state plans disclosed assets of just $2.6 trillion to cover total pension liabilities of $4 trillion.

There is considerable variability between the states, however. The funding ratio (assets as a percentage of liabilities) ranges from 99% for Wisconsin, which is in fine shape, to 31% for Kentucky and New Jersey, which are in deep doo-doo. The national average is 66%. Virginia is in modestly better condition than the national average with a funding ratio of 72%. Our net pension liability in 2016 was “only” $25.3 billion.

Admittedly, 2016 was a tough year in which state pension plans generated a mere 1% return on their investments, significantly short of the 7% to 7.5% returns that most plans are predicated upon. (Virginia assumes a 7% return.) Investment performance shined last year, which could improve 2017 performance when Pew gets around to calculating it a year from now.

However, investment returns are likely to become more volatile, Pew notes. As the gap between the return on 30-year Treasury bonds and equity returns has widened over the past two decades, pensions have shifted assets to riskier investments in the hope of generating a bigger payback.

The share of public funds’ investments in stocks, private equity, and other risky assets has increased by over 30 percentage points since 1990—to over 70 percent of the portfolio of state pension plans. As a result, pension plan investment performance now tracks equity returns more closely than bond returns.

That’s great news when the stock market goes up, as it did last year. But when interest rates rise and market multiples shrink, as is happening this year, pension funds are vulnerable to setbacks in stocks, private equities, and interest-sensitive real estate investments.

Pew has developed a set of analytical tools that allow a more penetrating look at a state’s pension posture. One of those is “net amortization as a percentage of payroll for each state.”

There are two ways for states to increase the assets in their pension plans. One is to earn a higher rate of return on its investment portfolio. The other is to contribute more (in employee contributions and government contributions) into the plan.

With the “net amortization” metric, Pew assumes that the pension plan earns the assumed rate of return (even though that assumption isn’t always justified). The idea is to determine whether state/employee contributions are putting in enough to cover new benefits earned that year. States the study: “Plans that consistently fall short of this benchmark can expect to see the gap between the liability for promised benefits and available funds grow over time.”

Some states are doing a horrible job — Kentucky, New Jersey, and Illinois are ticking time bombs. Kentucky paid in only 41% of its benchmark in 2016, and New Jersey only 33%. The national average was 88%. Virginia looked pretty good by comparison, paying in 101% and whittling down its net liability by one whole percentage point! Continue reading →

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Bacon Bits: Film Flam, State Workers, Fun & Games with Chicago Debt

Posted on November 14, 2017 by | 3 comments

Yummmm. So tasty.

Film incentives a money loser for state. Incentives for producing films in Virginia doubled under the McAuliffe administration, reaching $14.3 million in 2015-2016 and totaling $43 million over five fiscal years. But Virginia’s film industry has returned about 20 cents for every dollar it received in tax credits and 30 cents for every dollar in grants over the five-year study period, according to testimony yesterday before the Joint Legislative Audit and Review Commission (JLARC). Legislative auditors concluded that 95% of the productions would not have been filmed in the state were it not for the credits, reports the Richmond Times-Dispatch.

State employment compensation needs reform. Compensation for the state’s 105,000 employees is “nearly equivalent in value” to that of private-sector employees in Virginia. Although salaries lag the private sector by about 10%, the state makes up the difference with generous health insurance policies. The compensation package does have challenges, however, hiring employees in the fields of health care, health and safety inspection, public safety, and information technology, finds a new JLARC report. “State employee salaries could be more strategically managed if they were … prioritized for jobs that exhibit the most pressing workforce challenges.”

Boomergeddon watch: Chicago. Despite $36 billion in public pension debt, a prospect of $550 million in budget deficits over the next three years, and a reliance upon the state of Illinois, the budget of which also is in a shambles, Chicago just issued a AAA-rated bond. How is this possible? Chalk it up to creative financial engineering. The city is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds. This securitization insulates bondholders from the city’s finances. Chicago is using the proceeds to pay off old, higher-coupon paper, so it will ease its interest burden for a while. However, writes financial blogger John Rubino, “since [the city] runs a chronic deficit, it will soon be back in the market to borrow more, at which point it will have to pay up – since those AAA bonds are siphoning off so much money. Then the downward spiral will resume, with no more tricks available to delay the inevitable.”

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VRS Earned Above-Average Return in Fiscal 2017

Posted on July 11, 2017 by | 4 comments

A welcome piece of good news from state government: The Virginia Retirement System earned an 11.8% return on investment for the fiscal year ending June 30. The performance exceeded the 7% average return the system assumes for purposes of setting state and local contributions, and it is a big improvement from the previous two years. VRS assets now stand at a historic high of $74 billion, reports the Richmond Times-Dispatch.

Those numbers came from Del. Robert D. Orrock Sr., R-Caroline, after a semiannual meeting of the Joint Legislative Audit and Review Commission (JLARC) yesterday. The T-D article did not break down the overall VRS performance by investment category.

According to a March 31 VRS performance summary dated March 2017, investment returns over the first three quarters of the fiscal year were led by a strong performance of the pension fund’s equity portfolio, but most other investment categories did well, too:

Public equities — +13.2%
Investment-grade fixed income — -1.1%
Credit strategies — +8.0%
Real assets — +8.0%
Private equity — +12.2%
Strategic opportunities portfolio — +8.1%

The above-average performance may forestall the perceived need to undertake any additional reforms of the state pension fund or for state and local governments to increase their contributions. A year ago, VRS unfunded liabilities were pegged around $22 billion. The big question now: Can VRS replicate the performance next year? Can U.S. and global stock market averages continue their levitating act?

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UVa Attacks Administrative Bloat in HR Consolidation

Posted on May 26, 2017 by | 7 comments

The University of Virginia has downsized its Human Resources staff from 270 employees to 240, and could slim down by another 40 full-time-equivalent positions as it merges the HR departments of its academic and medical divisions, reports the Daily Progress.

The staff restructuring project, which UVa calls UFirst, is part of the university’s multi-year Cornerstone Plan, passed by the Board of Visitors in 2013, to save money on organizational costs. The current system is afflicted with “systemic inefficiencies and redundancies,” including “70+ disjointed systems that collect HR data and five different learning management systems across three entities,” states the UFirst website devoted to the new HR system.

UFirst is designed to cut down on bureaucratic waste and lead to a better employee experience. “UVa will be positioned to continue to attract and retain the best talent in support of excellence in education, research, patient care and public service,” UVa spokesman Anthony de Bruyn told the Daily Progress.

The university has experienced some pushback on the changes, as evidenced by an anonymous letter to the Charlottesville newspaper signed by “A dedicated and concerned UVa employee.”

The employee claimed that the senior university officials have not kept affected employees in the loop about the latest round of changes, reports the Daily Progress. “This is not the way people should be treated,” the employee wrote. “I have always been very proud of working at UVa and can’t believe we are being treated with such disrespect.”

De Bruyn says the university has posted information on the UFirst website and is holding informational meetings this month.

Bacon’s bottom line: Good for UVa! It’s possible that the university could do a better job of communicating with employees. But, let’s face it, when departments are consolidated, employees lose their jobs, and other people find themselves reporting to new bosses, it’s impossible to make everyone happy. The larger lesson here is that UVa, at long last, is taking concrete action to reduce the size of its burgeoning bureaucracy. A 26% reduction in H.R. manpower is serious business.

Indeed, UVa could be criticized for taking so long to execute the change. Higher-ed restructuring legislation enacted 12 years ago emancipated UVa from rigid adherence to state personnel policies, and the university announced its intention years ago to wring out savings through process and administrative reforms. By private-sector standards, the changes have been sluggish. But this a public university, so we should be happy to see reform of any kind. Hopefully, the administration won’t be spooked by the publicity and will carry through forthrightly.

Virginia Commonwealth University, it is worth noting, just received Board of Visitors approval for major HR reforms as well. As taxpayers and parents of students, let us hope these HR reforms portend even more serious attacks on administrative bloat in the years ahead.

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Virginia Pension Liability Gap: Still Worrisome

Posted on April 24, 2017 by | 15 comments

Graphic credit: Pew Charitable Trusts

Another year of tepid economic growth and another year of no progress on Virginia pension liabilities.

Nationally, the gap between liabilities and assets for state pension systems grew 17% in fiscal 2015, reaching $1.1 trillion, according to an annual survey by the Pew Charitable Trusts. Under-performing investments was the biggest driver, accounting for $125 billion of the gap. But even if investment performance had lived up to expectations, the national gap would have increased $30 billion anyway.

Virginia, which prides itself on its AAA bond rating, is hardly an example of fiscal rectitude compared to other states when it comes to funding its state and local pensions. On the one hand, the Virginia Retirement System (VRS) assumes a modest 7% compounded growth rate for its investment portfolio, while state pension plans on average assume a 7.6% annual return. Virginia’s conservative assumption protects it against the downside risk of disappointing investment returns.

On the other hand, Virginia has not been injecting as much money into the pension as needed. Pew has constructed a measure — net amortization — that tracks whether public pension contributions would have been sufficient to reduce unfunded liabilities had portfolio returns met investment assumptions that year. Explains Pew: “Plans that consistently fall short of this benchmark can expect to see the gap between the liability for promised benefits and available funds grow over time.”

According to Pew’s calculations, Virginia needs to contribute $2.5 billion a year. In 2015, the state did meet that goal — actually, it exceeded the goal by 1%. But 2015 followed a dismal shortfall (visible in the chart above) in 2014.

Virginia’s “funded ratio” was 75% in 2015, about the same as the previous year. That is marginally better than the 72% for the funded ratio of the nation as a whole. Of course, that national figure is skewed by the horrendously low ratios of Kentucky, Illinois and New Jersey, which are more or less destined by the iron law of mathematics to become the next Puerto Rico.

Virginia needs to do better. At the current level of state contributions, the VRS is at the mercy of the markets to perform as expected. If we’re lucky and maintain contributions, things will work out. If not, we’re in for a world of hurt.

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What the Obama Giveth, the Trump Taketh Away

Posted on March 14, 2017 by | 7 comments

Slash and burn

The federal budget sequestration may have kept a lid on escalating federal budget deficits, a good thing, but it was a disaster for Virginia’s economy. The cap on federal spending hammered a Northern Virginia economy built largely around the Pentagon. The ascension of Donald Trump to the presidency signaled a possible return to the region’s glory days as the new president promised to increase defense spending by $50 billion.

But the president has created massive uncertainty with a vow to slash discretionary spending in civilian programs and bureaucracies. The Washington Post is all in a dither:

The cuts Trump plans to propose this week are also expected to lead to layoffs among federal workers, changes that would be felt sharply in the Washington area. According to an economic analysis by Mark Zandi, chief economist for Moody’s Analytics, the reductions outlined so far by Trump’s advisers would reduce employment in the region by 1.8 percent and personal income by 3.5 percent, and lower home prices by 1.9 percent. …

Trump’s emphasis on defense spending might provide a buffer for Northern Virginia, although, as noted previously on this blog, there are some within his administration who believe that the Pentagon civilian bureaucracy needs to be whacked down to size in order to free more resources for fighting forces. Under a serious effort to rebuild the U.S. Navy, Hampton Roads’ military bases and shipbuilders could be big beneficiaries.

We can’t say anything with certainty until Trump releases the details of his plans later this week. But at this moment in time, it looks like the new budgetary policies could be a mild plus for Virginia with boosts in defense spending offsetting cuts in other areas. Conversely, Maryland and Washington, D.C., with their large non-military exposure, could be in for a world of hurt

Adding to Washington’s woes…. The metro area’s job performance in 2016 has been revised downward. Reports the Washington Business Journal: “The D.C. region added 55,600 jobs in 2016, according to final data released Tuesday by the Bureau of Labor Statistics — about 16,800 fewer than the agency had initially counted.”

“We are talking slashing and burning several different agencies on the discretionary, non-defense side. That could have a pretty chilling effect for the local economy,” said Clifford Rossi, a professor of the practice at the Robert H. Smith School of Business at the University of Maryland-College Park.

Rossi agreed that the revised job growth numbers reveal an economy that was weaker than it originally appeared, and that the federal spending cuts proposed by Trump could have a compound effect on the regional economy.

Bacon’s bottom line: Actually, the loss of 1.8% employment and 3.5% income is no worse than what dozens of other metros experienced in the last recession. But have compassion! Washington has never been through anything like this before.

(Hat tip: Rob Whitfield)

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Posted in Economy, Federal, Government workers and pensions, Labor & workforce, Land use & development

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The Biggest Lie of All: Government Can Pay Its Pensions

Posted on February 23, 2017 by | 2 comments
State-local pensions are just one aspect of unsustainable government spending.

State-local pensions are just one aspect of unsustainable government spending.

Many people get infuriated by President Trump’s many inconsequential falsehoods — does it really matter how big his inaugural crowds were? — but they remain sanguine about the trillion-dollar untruths that our public pension system is built upon. The big lie that governments will make good on retirement promises to their employees is not merely mendacious but it is destructive. Millions of Americans have built their retirement plans around a fiction. And when the Ponzi scheme collapses, government workers won’t be the only ones to suffer.

In his latest column, George Will recites some of the more glaring examples of how the big lie is unraveling.

The Dallas police and fire fund recently sought a $1.1 billion transfusion, a sum roughly equal to the city’s entire general fund budget yet still not close to what is needed. Last year Illinois reduced its expected return on its teacher retirement fund portfolio from 7.5% annually to 7% (which is arguably still too optimistic), meaning that the state needs to add $400 million to $500 more to the fund — annually. Last September, the vice chair of the agency in charge of Oregon’s pension system wept when speaking about the state’s unfunded pension promises of $22 billion. Nationally, unfunded liabilities for teachers, not counting other government employees, amount to at least $500 billion.

And don’t get me started on the fact that the Medicare hospital trust fund is expected to run out in only 12 years and Social Security trust fund in 16 years, at which point payroll tax revenues will be insufficient to maintain full benefits… Or the fact that the pensions run by companies in the S&P 1500 Index were unfunded to the tune of $562 billion.

Some of the shortfall can be attributed to absurdly generous provisions of pension plans in particular states and localities, some to fiscal indiscipline by government at all levels, and some to the Fed’s seven years of near-zero interest-rate policies that have depressed returns on bond portfolios and juiced stock market gains that cannot possibly be replicated in the years ahead.

Will concludes with the salient point:

The problems of state and local pensions are cumulatively huge. The problems of Social Security and Medicare are each huge, but in 2016 neither candidate addressed them, and today’s White House chief of staff vows that the administration will not “meddle” with either program. Demography, however, is destiny for entitlements, so arithmetic will do the meddling.

Few elected officials are willing to deal with the issue that offers no immediate political reward. Here in Virginia, one of the few, House Speaker William J. Howell, R-Stafford, has announced that he will not seek re-election.

Thanks in part to Howell’s stewardship, Virginia’s budget, backed by a AAA bond rating, is in better shape than those of many other states. But the U.S. learned after the 2007 real estate crash what AAA bond ratings are worth when the economy shifts from normal conditions to crisis conditions. Boomergeddon is coming. The only question is when.

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