vrs_portfolioby James A. Bacon

House Speaker William J. Howell is rightfully concerned about the long-term health of the Virginia Retirement System. The pension system’s own actuary estimated a year ago that the $68 billion retirement system has unfunded liabilities of $22.6 billion.

On Sunday, the Richmond Times-Dispatch’s Michael Martz described the debate over restructuring the VRS from a defined-benefits system to a defined-contribution system. Today, Martz reports how Howell is questioning the outsized fees paid to outside fund managers, who handle two-thirds of the system’s assets.

“My biggest concern is the unfunded liability and the fact that it’s just going to grow,” Howell said.

Howell has every reason to be concerned. Unfunded liabilities might turn out to be far bigger than the actuary’s estimate. As I have observed many times, the liability is based upon an assumed 7% annual rate of return on the $68 billion portfolio. If the system under-performs expectations, as the VRS has done the past two years, the unfunded liability can grow by tens of billions of dollars. Writes Martz:

For Howell and other lawmakers on the [Virginia Commission on Retirement Security & Pension Reform], however, the retirement system’s recent investment performance has raised questions about whether the 7% assumed rate of return is too optimistic for the longer term, especially with interest rates keeping bond yields low for the foreseeable future. …

The 7 percent return, lowered by the VRS board from 7.5 percent in 2010 is among the lowest in the country for public pension funds, said Katie Selenski, state policy director for the Pew retirement initiative. “At 7 percent, you’re in a good, prudent position.”

Prudent? Not really. The pie chart above shows VRS’s portfolio allocation. Some 17.6% consists of fixed income assets. Barring some bizarre experiment with negative interest rates in the U.S., there is no way in a zero interest-rate environment that these assets can generate a 7% return. Another 39.8% of the portfolio consists of equities. Insofar as the bull market in stocks over the past 30 years has been driven by lower interest rates and an expansion of earnings multiples, there is no way to replicate the stock gains of the past ten years. Indeed, earnings and earnings quality of stocks are deteriorating, not a good sign for near-term price performance. Meanwhile, the performance of hedge funds nationally has been dismal of late. There is no rabbit to pull out of the magic hat of alternative investments.

For another view on the outlook for long-term portfolio performance, it is instructive to turn to the University of Virginia, which, whatever one might say about the Board of Visitors’ strategic priorities, one must credit with doing an excellent job of managing its endowment. The 10-year return of the University of Virginia Investment Management Company (UVIMCO) has been 10.1 %, according to its 2014-2015 annual report. That compares to 5.8% ten-year performance calculated by the VRS in 2014-2105.

How much do UVa’s masters of the universe think they can earn on their portfolio looking forward? As best as I can tell from perusing UVIMCO’s annual report, they don’t say. UVIMCO doesn’t report that assumption because it isn’t relevant:  Although UVIMCO does have unfunded commitments, it is not a pension fund in which shortfalls must be made up by taxpayers.

Still, it is possible to get a sense of UVa’s expectations from comments made by university officials that they expect the controversial $2.2 billion Strategic Investment Fund to throw off $100 million a year to pay for programs to advance the university’s strategic goals. University officials have not explained what rate-of-return assumptions they are using. But a simple calculation reveals that $100 million is only 4.5% of $2.2 billion.

From that, one can draw one of two conclusions. Either UVa’s investment mavens are assuming a much lower rate of return than the VRS, or they expect a higher-than-4.5% rate of return but plan to retain a substantial fraction of the earnings, presumably in order to grow the size of the portfolio.

It appears that the second conclusion is true. Here’s what the UVIMCO annual report says: “Each year a portion of the endowment value is paid out to support the fund’s purpose, and any earnings in excess of this distribution help build the fund’s market value over time. In this way, an endowment fund grows and provides support for its designated purpose in perpetuity.”

For legislators digging into UVa’s controversial Strategic Investment Fund, which is managed by UVIMCO, it would be interesting to know what rate-of-return the university is assuming for its endowment and what percentage it figures on spending and what percentage it figures on retaining. The numbers should be equally interesting to Speaker Howell. It would send out a flashing yellow caution signal if the UVIMCO’s assumption about of future performance was more conservative than that of the VRS.

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50 responses to “Digging into Rate-of-Return Assumptions”

  1. Questions:. 1. What are ‘credit strategies’ and what return do they generate? 2. What ‘real assets’ play are we talking about? 3. What sort of ‘ public equity’ investment: capital appreciation oriented, or blue chip, or index fund, etc? Obviously there is a lot more to these categories in their pie chart than the labels tell us. With added information maybe one could compare, say, to UVIMCO’s approach (and risk profile).

  2. VaConsumer Avatar

    Do you really think individual state workers can manage their retirement assets better than experts with large sums to leverage? This sounds to me like they want to take retirement benefits away from employees and that is NOT what this country needs.

    We are letting companies go bankrupt and leave retirees high and dry. Increasingly individuals are responsible for saving from current spending for retirement 30 or more years in the future and with effectively managing those resources for long term growth. However most people do not have the skills to do it. Many are in life situations where they have to focus on now and cannot imagine long term goals. Mistakes include everything from making too safe and low earning choices that do not result in asset growth to trusting someone who fleeces you with fees.

    I have been involved with delivering preretirement education to state employees. I’ve had multiple people not even able to use a basic calculator. If we think these folks will manage better for retirement than the experts, we’re kidding ourselves. I don’t have the time or interest to effectively manage my own retirement funds, either. Most of us don’t.

    If we fail to shore up retirement funds and dump the responsibility on unprepared and unsupported individuals we can expect poor, starving senior citizens that no one can afford to help to be dumped on society. Didn’t we learn anything from the time before social security was created?

    1. LarrytheG Avatar

      VaConsumer tells the truth , unfortunately. If people could actually manage their social security as an investment – I suspect disaster would ensue and if people were actually able to voluntarily participate in social security – would guarantee that taxpayers would get whacked later.

      and as a volunteer tax preparer – I cannot tell you how many people “cash” their 401K’s – without a clue that not only will it be taxed but it will be penalized for early withdrawal and their excuse almost always is they had “expenses” … like car payments or they fell beind on their mortgage or had to repay student loans.

      and in this “sharing” economy – a steady stream of people , maybe 1 in 10 knows that they have to pay the FICA self-employment tax. This would be your Uber/Lfytt drivers and first-time independent contractors who find out at tax time that they’re actually often working for something like $5 an hour…plus tips.

      so… the essential truth is that almost no one – at the individual level – thinks in terms of “unfunded liabilities” for their OWN retirement even the ones attacking the govt for it’s “unfunded” sins.


    2. VAConsumer, I agree with your point, management is beyond the capability of most individual retirees. I don’t like Howell’s cure for this situation. But that isn’t JimB’s issue here; he is talking about unfunded VRS (Virginia) liabilities based on the traditional pension model and earnings assumptions that may be too optimistic. It’s a valid concern whether VRS is predicting too rosy a future at 7% annual rate of return on its assets. It’s valid to ask, why is UVA’s UVIMCO able regularly to achieve >10% and VRS is struggling to get above 5% let alone 7%.

      As for Howell’s solution, he would simply turn these funds over to the employees. Not only would this pass the buck to the employee for future investment risk, but also for current underfunding levels. Forget that! I applaud a retirement system that, like a 401(k) plan, allows the future retiree to have a say in how his/her funds are invested by a competent manager, but NOT one that REQUIRES the employee to manage the funds directly or invites withdrawal and squandering. But that is another discussion.

  3. LarrytheG Avatar

    looks like multiple issues with VRS.

    I don’t know why Virginia is paying such a high premium for fund management especially when it appears the VRS is underperforming other funds , not only the UVA fund but any cursory examination of the stock market demonstrates that it is not suffering from the “zero” interest malady…

    As I said in the other thread – if Virginia could emulate FERS – it would be a win-win for the state as well as the more than 800 employers that participate in VRS and 676,000 members (that info not easily found on the VRS page).

    also – VRS also offers several defined contribution plans already


    ….so what Howell is after in the way of “reform” is a little open-ended and I’m sure leaving people wondering what he really is after.

    I’d feel more comfortable to be honest is there was a genuine multi-stakeholder commission and full transparency including what reforms to recommend.

    I think it may actually be inappropriate for Howell to be occupying the position he has taken…. not enough transparency and not enough input from other stakeholders.

  4. TooManyTaxes Avatar

    With most of the private sector workers not having traditional pensions, i.e., defined benefit plans, is it fair to insist they pay higher taxes and/or see programs left with lesser funding to shore up defined benefit plans for government workers? Especially, since most federal workers have moved from a total defined benefit plan to a combined defined benefit/defined contribution plan?

    And if it is fair, why is it fair?

    Now is the time to change into an affordable retirement system for public sector employees. And I’m not arguing for changing horses in mid stream for those at or approaching retirement age.

    And perhaps, we need a change to federal law that prohibits early withdrawals from 401K and its cousin plans except in case of a bona fide emergency – which isn’t a late car payment.

    1. LarrytheG Avatar

      I don’t think you make employee’s benefit the enemies of taxpayers though. You might want to decide how many public-sector employees taxpayers we can afford in total but the ones you do hire – you want to have equivalent, competitive benefits to other jobs or else the state will get a reputation of not having good jobs and not attract quality people.

      For instance, you WANT TOP NOTCH budget analyst folks working on locality budgets. you want well-managed counties and and good quality law enforcement and 911… if you skimp on these -you’re got to damage the quality of the service itself.

      When you dial 911 – you have an expectation for a response in a number of minutes and a qualified EMS and if you short-fund that – you damage the quality of it.

      Having said that – I’m still wondering if VRS does offer defined contribution plans in addition to the defined benefit – which is what the Feds do -is the state comparable on the size of the defined benefit or does it did to be re-jiggered to be smaller and require more put on the defined contribution part?

      and curious – how big in the current unfunded liability compared to the total budget.. how much we give higher ed.. how much MedicAid costs… how much “unfunded” deficient bridges we have…etc.. how do we compare to industry unfunded or other states … the unfunded military pensions?

      In other words – we need some kind of proportion and perspective..of the problem in terms of what it is and what it is not…
      otherwise it just feels like we’re going after waste, fraud and abuse just because we know there is some but we have no idea what’s a reasonable number to work towards.

    2. LarrytheG Avatar

      re: ” And perhaps, we need a change to federal law that prohibits early withdrawals from 401K and its cousin plans except in case of a bona fide emergency – which isn’t a late car payment.”

      they have exemptions like medical or new home … etc…

      but it would be a sea change for the Federal Govt to not let you get to your own saved money…. but perhaps there are good reasons to do this for the same reasons you cannot touch your Social security.

  5. I think for the UVA Strategic Investment Fund, the 4.5% calculation would the annual payout. The payout level is set at a level intended to maintain or even grow the value of the endowment over time. The assumed payout level for university endowments used to be 5%, but they seem to have lowered it as forecast returns have gone down.

    You raise a good point, though, that the fund may have to be invested more aggressively, like large university endowments, which make returns similar to UVIMCO. This increases, risk, though. UVA invests in Hedge funds and the like, and was even rumored to be having liquidity issues due to this during the 2008 downturn. Harvard even had to sell off stuff at a big loss to stay liquid.

    Also, the pension fund may have restrictions placed on it that UVIMCO does not.

    1. Yes, risk versus reward is the tradeoff. Sometimes risk managers opt to be excessively safe: nothing above average (let alone spectacular) ever gets achieved but there are no losses to explain either. If we don’t ask questions about these low return expectations at VRS, the riskless path is the easiest path for a lazy money manager to follow.

      1. LarrytheG Avatar

        well.. the UVA fund is not paying promised benefits to people who are depending on that money to live.

  6. Hill City Jim Avatar
    Hill City Jim

    And you are worried about a couple of billion?

    1. LarrytheG Avatar

      now – THAT’s putting it in PERSPECTIVE!

      so how big and bad is Virginia’s unfunded liability problem comparatively to others?

      looks like we can do better:


  7. LarrytheG Avatar

    re: ” Do you really think individual state workers can manage their retirement assets better than experts with large sums to leverage?”

    I actually think they can if they have the Fed Govt TSP.

    not the official site though.


    note the lifecycle funds…particularly –

    I think the average person would find enough advice and tools with TSP to make informed decisions. I’d actually be curious to know if TSP has stats on how employee’s overall have fared in their TSP accounts… and what percent have screwed up.

    1. LarrytheG Avatar

      just saw that the “investing” is not the official site

      here is the official site tools:


  8. VaConsumer Avatar

    I know from close personal experience that when a conservative investor is totally responsible for investing and managing retirement assets – and has kept it in “safe” CD’s and a bit in a mutual fund – the growth does not occur, especially in a market like we’ve had most of my working years. Keeping the money safe from early spending is one issue but if it’s not managed right, there will not be enough growth to do the job. We will need a lot of major changes to avoid a society of impoverished seniors too weak to work and no options for income. I fear that is what folks are setting us up for. Higher income folks will be OK. Those on the edge and in average situations will have nothing.

    We need to protect all workers from this problem, not just government workers. We’re bailing out the companies and leaving individual workers holding the bag.

    1. LarrytheG Avatar

      I agree with your concerns. I do volunteer taxes and our target demographics are the young low income and older seniors without weath.

      The horrible truth is that most of the seniors we do taxes for – would be destitute and not even able to afford shelter and food if it were not for three things – Social Security and Medicare and Medicaid – yes healthcare for the poor – I’ll explain down below.

      And I’m not talking about the truly poor – I’m talking about a lot of ordinary people who worked all their lives and never took entitlements.

      Without those -we literally would have seniors – on the street and I’m not exaggerating.

      To be fair – we also see an equal number of seniors who also have pensions in addition to social security but they are not living high on the hog by any stretch of the imagination… they typically can afford the things that Medicare doesn’t pay for, dental, optical and hearing aids.

      Almost none of them have long term care and from personal experience I can tell you that most long term care does not cover much more than a few hours a day of home care. If you need all day or 24hr care – you’re going to a home paid for with MedicAid.

      A significant portion of Medicaid for the “poor” (don’t confuse with Medicare) in Virginia pays for nursing home care of seniors who do not have the resources to afford home care even though they have Social Security and Medicare (which does not pay more than 120 days of nursing home care) and often own a home and other assets.

      their final days will eat up most of their assets if it were not for Medicare and MedicAid.

      the biggest components of the Federal budget both deficit and debt and the Virginia State budget costs is Medicare and MedicAid.

      17% – 14 billion is Medicaid in the Va budget. to give some perspective 18 billion is the total amount we spend for education.

      so . the bottom line is that very few people save enough money for their retirement if you include the total health care costs.

      all the discussion about “unfunded” does not come close to the unfunded part of health care as we get older. This part is , in my view, a far bigger threat to our fiscal well-being than pension funds which are only the tip of the iceberg when you look at the health care costs for retirees.

      1. VaConsumer Avatar

        You are exactly right. Many people don’t understand that Medicaid is what pays for most nursing home care and people who turn red with frustration about young low income people using it for health care consider it the appropriate way to pay for their own nursing home care. There are folks out there who help people “give away” and “protect for heirs” assets so they qualify for Medicaid. The coming disaster for the government related to nursing home care is even bigger than retirement funding. That fact is one more reason why we’ve got to find a sustainable way to get retirement funded and appropriately managed no matter who people work for. Everyone needs retirement funds. Those without them will end up dependent upon society – which will cost all of us.

  9. Howell is deflecting a bit. Switching to a defined contribution plan will not erase the existing under-funding of the pension fund. Moving to a defined contribution plan (as 74% of the S&P500 companies have done) is a good idea. Most importantly it frees the employee from the tyranny of waiting for retirement age. When your retirement fund is portable your employer has to convince you to stay.

    How the Imperial Clown Show in Richmond can claim it has balanced the budget when running a pension shortfall of $22b is a mystery to me. Either the employees receive fewer benefits (basically breach of contract in my mind) or there will a miraculous change in real rate of return (wishful thinking) or the budget was never really balanced. Oh wait! I forgot. It’s the government and honesty / integrity are in very short supply.

    The idea that an individual can’t earn as high a return as the so-called professionals is naive. The professionals have a big problem – they have to make payments out of the fund every year. A 35 year old in 2005 who would have simply put her entire 401(k) contribution into a fund that tracked the S&P500 would have realized a 7.919% annual return (with dividends reinvested). That’s more than 2% per year better than the so-called professionals running the VRS fund. Imagine that – despite the Great Recession being smack in the middle of the 2004 – 2014 investment period a simple “buy the index” strategy would have yielded almost 8% per year.

    I don’t know what to say about state employees who can’t use a basic calculator. The state failed those people long ago.

    Jim – you seem like a Bill Howell type of guy. Next time you see him at a bourbon and branch water party maybe you can ask him how switching to a defined contribution plan closes the pension shortfall and how 240 years of balanced budgets led to a pension shortfall of nearly half the state’s annual budget. Oh yeah – also, what the hell does the dingbat propose be done about that $22b shortfall. I’ll keep my eyes peeled up here for Terry McAuliffe at one of our local pinot noir parties and will ask him the same.

    1. I talked to a well-informed person today who suggested that an honest actuary, positing a realistic investment return on the VRS portfolio, would hold the pension shortfall closer to $45 billion. How do you like them apples?

      How did the pension shortfall appear? Well, figure that in 2000 or thereabouts, the VRS was said to be fully funded. That was before the 2007-2008 crash and the Fed’s zero interest rate policies. The General Assembly effectively borrowed from the pension to “balance” the budget and get through the recession, and then average investment returns declined.

      Virginia is hardly alone. Every state in the union, and insurance companies, and a lot of private pension funds, are dealing with the same problem. Bob McDonnell offered partial reform. Howell is trying to enact another round of reform. They’re all playing catch-up.

      1. I think you are right on all counts. Failing to properly fund the pension so you can claim a balanced budget is just another lie. A deception perpetuated against the ultimate guarantors of that pension – Virginia’s taxpayers. I have little doubt that the stated shortfall is underestimated. A shortfall that approaches the state’s annual budget presents immense problems. Whatever happened to “the best state for business” pap that was so spouted by our political elite and the chattering class that supports them?

        Politically speaking, the RPV has a strong hand to play here. I am guessing that more Virginia voters have defined contribution plans than defined benefit plans. The idea that relatively well compensated state employees should be among the last of the defined benefit plans will seem odd to a typical voter. Beyond that, there is a huge problem with the state’s defined benefit plan and it will be relatively easy to explain to the voters what kind of tax hike it would take to set that right.

  10. LarrytheG Avatar

    lots of vague stuff here… thrown on the wall with little specifics… geeze…

    re: balanced budgets- well – you probably could say that about Fairfax and Henrico budgets also if your standard requires all of your pensions liabilities to be fully funded.

    I’m pretty sure Spotsylvania and their School systems are not now that they are required in the budget by GAPP and CAFR requirements. Don’t forget OPEB either which may be what Jim’s source was alluding to with the 45 billion.

    re: pensions be paid out now versus pension liabilities for people who have not yet retired. there’s a difference.

    re; how to go from fully funded to liabilities – by the state “short funding” it’s obligations.

    not likely but if so then that borders on malfeasance and would note that the budget lady at a local BOS meeting in a discussion about pension contributions that the locality had no choice but to pay what was scheduled by VRS. I would suspect it’s the same with State agencies in THEIR agency budgets instead of the General Assembly funding all state obligations as a line item in the State budget but this would be easy to prove if it were true and perhaps if someone is going to make that claim -provide a link to the state budget and show how they went from one year to another and short funded…

    …. or admit you don’t know or are speculating..fairly wildly

    like Don – I don’t think Howell is being straight with folks on his “plans” and further I do not trust the Clown Show , without great assistance from professionals, to monkey around competently with pension issues. sorry, but these guys prove time and time again that they screw things up when they are driven by ideology of which the unfunded pensions issue has become.

    Finally the zero interest stuff … jezus H. Keeeerist… Bacon just cannot let go of that bone!!!!

    As pointed out – the stock market is doing pretty good these days and funds like the UVA fund and others seem to be doing well with the funds that are not doing well – perhaps overly invested in bonds. that info would be helpful – for instance in the VRS case right now.

    I suspect they were more heavily invested in stocks in 2005 or so and like many others got savaged by the sub-prime disaster…is that what happened to their fully funded one day and liabilities the next?

    Howell might be right about the amount of personnel and fees involved in managing VRS – but again – I’d like to see comparative data before I’d agree that just making the claim is sufficient to take action…. and the investment arm of VRS is damaged by penny-wise and pound-foolish stuff.

    Now – if I hear that McAuliffe AND Howell … ARE on the SAME Page then I’m more comfortable going forward.

    But if Howell is working with ALEC and the folks who advised Kansas – not so much.

    1. Normally you invest in safer assets (like bonds) if you have upcoming payouts. Conversely, you invest in riskier assets (like equities) if you have no need for the invested money for some time. I’ll grant the state something of a break vs UVA because the state has existing payment obligations and a lot more coming as retirements accelerate. This is where Jim’s zero interest bond challenge comes to the fore. It breaks traditional portfolio theory by removing the component of relatively safe debt investment with low but real positive returns. Through the actions of their central banks governments have neutered that asset class. This has at least three perverse results:

      1. Pension funds tend to underperform creating a need for more contributions (from the taxpayer in the case of government pensions).
      2. It impoverishes the elderly who must remain liquid and invested in relatively safe instruments. They simply cannot get a return from reasonably safe investments.
      3. It dramatically favors those with substantial net worth who can “wait out” a downturn in the equities market. This, in turn, invreases the wealth and income gaps.

      Jim’s concerns over the zero interest policies designed to allow excessive government borrowing are well founded.

  11. LarrytheG Avatar

    Here’s an interesting exercise that may not be much more than a curiosity.

    take the total VRS fund – 68 billion
    and then divide it by the current number of folks participating in VRS – 676,000

    68,000,000,000 / 676,000 = 100,591

    no one should try to use these numbers for any kind of a calculation – they are purely FYI… but give some perspective on the fund on a per capita basis.

    that 676,000 number is pretty impressive for a state of 8 million folks… though…

    in 2014, 1,353,738 Virginians were receiving Social Security – which you have to be careful with because some of them might also be folks getting VRS…. from work they did before and after their govt jobs.

  12. Cville Resident Avatar
    Cville Resident

    Keep an eye on this “Commission.” I will guarantee that it will not get to the true root of government compensation/benefits problems.

    IMO, the real problem with our current structure is equity. Go take a look at gov’t professional salaries. Engineers, attorneys, doctors, finance, high level administrators…a lot of these people are very underpaid. I know an engineer who just retired from the state. Very good and competent individual. His final wage was in the 80s. A lot of assistant attorney generals can work 30 years and barely crack 100K in compensation. The doctor payscale is a joke compared to the private sector.

    If you take away the defined benefit pension for these highly skilled people, I have real doubts about having competent people in these positions. If you’re a good engineer, you probably aren’t going to stick around for 30 or 40 years to make $80K. I know it’s unpopular to say, but the higher level gov’t positions have low salaries compared to their private sector counterparts. The defined benefit is necessary to keep them or a very large salary bump is necessary if the state does away with the defined benefit pension (talk about politically unpopular).

    On the other hand…so much of gov’t is way overstaffed at the lower level. Secretaries, technicians, clerks….and these people do make a lot more in salary than what remains of their private sector counterparts (though most of those jobs no longer exist in the private sector or are very lowly paid) plus they get the sweet defined benefit pension. The salaries compared to higher level folks in the state are insane…you’d never see such “equity” in the private sector for low and high skilled employees.

    If this commission was serious, it would look at reforming compensation and lowering personnel costs for lower and mid level skills and raising compensation for higher skilled state employees.

    1. LarrytheG Avatar

      We go through this at the county level every few years and it’s a worthy process and I guess I’d be surprised that any agency would continue to have lower level workers that are not needed…and sitting around or doing make-do work because the State these days routinely cuts agency budgets and lets them decide where to make them and you can bet they’re not going to cut their high skill folks that are necessary for their mission.

      What I’d agree with is a system where the pension and the health insurance are portable and let the employee not be hold hostage especially at the mid-career level where they’re having to decide if getting cut when they get older cripples them in looking for work when they are nearing the top of their scale and retirement.

      I strongly suspect that that if pensions are made more portable and some kind of guaranteed portable health insurance remains available that the State will have to up their game to get and keep quality people and that includes people below the credentialed professional level as today – many lower level jobs require higher level skills not found in every job prospect.

      These days when agencies are cut – they don’t get rid of their skilled people and keep the lower level who can’t do the work… but at any rate – you let the agency folks decide this – you don’t do it top-down from the State level that knows nothing about the specifics of each agency’s workforce.

      To give an example – I am on a citizen board for a small MPO that has fewer than 10 employees. Not a one of them is a secretary or clerk. They’re all professionals and they all do their own secretarial and clerk work as part of their job. The county where I live is the same way – the only secretary’s these days are in the County administrators office – below that level there are few… as most correspondence these days is direct email to email and the “filing” is electronic. When you call – there is no person – it’s pick an extension, etc.

    2. Cville, very good point. Reforming the pension system needs to go hand-in-hand with reform of the larger system for compensating state employees. Being a state employee used to be a cushy job. But after years with no pay raises, it’s not any more. With the thousands of Baby Boomers due to retire in the next few years, maybe it’s time to re-think the system.

      1. Cville Resident Avatar
        Cville Resident

        I agree. Though I think this is a more global argument about “government workers” at the federal, state, and local level.

        Based on tradition, American society came to believe that government workers should not make “outrageous” salaries. Somehow, we’ve come to expect that government workers are mediocre and therefore deserve capped salaries for the high-skilled positions.

        I think this is an antiquated view. I have no doubt that we need to look at efficiencies and how the private sector operates. Let’s be honest: look at the state and local budgets…they’re almost all 70% or greater in personnel costs. That can’t go on. But….if we want to have an A-game gov’t, then we need to pay A-game salaries. I am sure that if high level administrators were paid what they make in the private sector AND given more leeway for lay-offs and terminations….we would probably have a more efficient gov’t with fewer personnel costs. The only way we are ever going to get out of the 70%+ personnel budget is by reducing bodies. That’s only going to come from innovative, class A management.

        I note that Henrico County is a very well-paying local government, and it is my understanding that a lot of state workers leave the state for Henrico. While every organization can improve, from everything you write and other things I read…Henrico is a well-managed gov’t. In other words, you get what you pay for….

        I know this thinking goes against the American tradition of treating gov’t workers differently. But I prefer a model in which high skilled gov’t employees are held to high standards BUT…if they perform well, they get good compensation packages just as they would in the private sector.

        I have a feeling that if we allowed the higher levels to operate more efficiently (less civil service protections, grievances, etc.) and paid well enough to attract good minds, our gov’t would probably be less wasteful and more efficient.

  13. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    I have not been closely following this conversation and know little about the details of the subject at hand. But know several lifetime career Virginia employees who on retirement received incredible pension packages. Even in cases of early retirements at a very young age, after say 20 years work, they walked away annual payments pegged at a very high percentage of their last years pay as annual starting base pension for life plus great health insurance, with great coverage at low deductible, and otherwise cost free for life. It they are common examples, the Baby boomer Va. state worker retirees are going the hit Va. finances like a ton of bricks.

    1. LarrytheG Avatar

      I can tell you Reed as someone who does taxes that the VRS pensions I see are meagerly… some of them in the teens… I’ve seen none that are more than 30 or so.

  14. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    I have not been closely following this conversation and know little about the details of the subject at hand. But know several lifetime career Virginia employees who on retirement received incredible pension packages. Even in cases of early retirements at a very young age, after say 20 years work, I walked away annual payments pegged at a very high percentage of their last years pay as annual starting base pension for life plus great health insurance, with great coverage at low deductible, and otherwise cost free for life. if they are common examples, the Baby boomer retirees are going the hit Va. finances like a ton of brick.

  15. VaConsumer Avatar

    LarrytheG, state employees all pay into social security as well as VRS. It’s only federal employees who have not always paid into social security. Not being one and not working with folks with federal appointments for some years, I’m not sure what the situation is today. I believe even most federal employees are now in social security because there was so much backlash against the comparative advantage of the federal system. I know that many positions in states that were federal have dropped to state only over the last 30 years or so.

    ReedFawell 3rd, there was a time when state employees could retire early and get great packages. That time is over. We’ve already started reducing the expected retirement benefit for new employees – and the state has done that several times in the last couple decades. Other than the fact that state employees have a defined benefit option (which admittedly is a huge advantage) state employees don’t have as great of advantage compared with other workers. The initially lower and largely stagnant pay scales over the last 20 years or so means that there are more state employees leaving state employ for better compensated private sector positions than people pushing to get into the state system. All state employees are strongly encouraged to make additional personal retirement investments. Many are now working well past when they planned to retire to make up for salary increases that didn’t come and to assure that they have health benefits since it appears that it’s considered OK to change the rules on folks, even after they are retired. Government employees who used to plan for retirement when in their 50’s are now working well into their 60’s but even that may not assure that they have the resources they need in retirement.

    What we have is a societal problem where the federal government has spent the extra money workers paid into social security and Medicare instead of saving and investing it as workers were told when rates last increased to “save” the system. For VRS, the state decided to not fully fund the retirement obligation for a number of years. The legislature thus “found” money for other things when times were tough by doing its own calculation of the obligation, ignoring the advice from VRS to fund at higher levels. Now both federal and state levels are facing the results of those decisions but they are not being honest with the public or employees and are trying to paint the employees as greedy, over-compensated, etc.

    As major companies, who also followed the path of not fully putting aside the money needed to meet their retirement obligations, have realized they had problems, we’ve allowed many to get rid of the obligations through bankruptcy. The city of Detroit did the same thing to government employees. Realizing that the high rates of return earned in the go-go years are not coming back soon and that the small rates of return of recent years are reality, businesses and governments are seeking ways to get rid of the coming obligation.

    This has been going on for a while now, with more and more employers dropping defined benefit programs. While 30 years ago most employees had access to defined benefit programs, today few do. Policy makers are now doing the same thing to government employees that business have done to theirs. New employees have increasing loss of defined benefit options and generally, less help preparing for retirement.

    That’s what this is all about. When past policy makers made decisions to temporarily underfund retirement, they anticipated being able to make it up in the future. Now they realize it’s not possible. Our businesses and governments have not put aside enough money for the long term goal of funding retirement, the economy doesn’t show any signs of huge growth to replace the forgone investments or even the expected growth, so they’re trying to dump the responsibility. If our government can’t be disciplined enough to set aside the money, do we really think individual workers can be disciplined enough to forgo current income for a future retirement that they often wonder if they’ll live long enough to reach?

    We need to be looking deeper and harder for solutions to the problem. Something has to change in a big way. Dumping on employees cannot be the only solution. So far, it’s been the easy way out and it’s what business has used so government is seeking the same. If that happens, we’re setting ourselves up for some major issues in the future as people live longer than their assets when they are past working condition. We need creative but well founded solutions – not just for government employees but for everyone.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Thank you for that very informative answer.

      The individual state employees I was referring too in my comment above retired in their early 50’s some 15 years ago (one with hazardous duty pay tacked on), so they are now in late 60s. One now has chronic health problems whose annual costs almost 100% paid by pension insurance are going through the roof, currently running at tens of thousands a week.

      So, for example, we combine your assessment with exploding out of control heath costs for most everyone, but particularly the rapidly expanding elderly (fed by onrush of baby boomers), and the exploding costs of higher education for children and grandchildren, and the out of control spending on public capital improvements, combined with stagnant wages, rampant and rising drug use, the dropping participation in the workforce by many, particularly males together with the declining growth (now chronic) in our national economy that suffers under endlessly increasing regulations and taxation, all as amplified by an increasingly dependent population looking for, and getting, ever more public financial support in myriads of old and new ways (novel claims, rights and afflictions like workers comp. rising at alarming rates, all of this coming together for a cumulative, indeed exponential, impact, WELL considering it all, I would suspect that it’s quite a fix we now getting our-selves in.

  16. LarrytheG Avatar

    Companies that went bankrupt their pension obligations went to taxpayers via the Pension Benefit Guaranty Corp – over 5000 ….

    but again – are we sure the state funds VRS as a bulk line item in the budget or does it filter down to agency levels?

    Keep in mind that the State agencies are just a part of VRS. Counties, Cities, various library, jail, water authorities , colleges, social services, courts, etc.. over 800 entities in total:


    I’m pretty sure these non-state agencies fund their own VRS pension obligations… and there are 342,524 actively employed participants – Google VRS Oversight Report July 2015

    only 106,000 are direct State employees… median income 44,656 and I think that College professors are included in that.

    my point – there are a whole lot more folks on VRS that just state employees…

  17. LarrytheG Avatar

    here’s some more general info:

    The average federal pension pays $32,824 annually. The average state and local government pension pays $24,373, Census data show. The average military pension is $22,492

    http://usatoday30.usatoday.com/money/perfi/retirement/story/2012-07-19/federal-pensions-in-excess-of-100-thousand/57059716/1 (data is 4 yrs old)

    that’s not awful if your house is paid for and you also get social security.

    and these numbers are consistent with what I see when I do volunteer taxes.

    1. Cville Resident Avatar
      Cville Resident

      The one thing that should be kept in mind about changing pension systems is the employee base that is already on VRS. I think those that are already vested (5 years or more service) should be able to continue on the current defined benefit plan. I think reform is needed, but I also think fairness is warranted for those that have already put in enough time in the system to begin their retirement planning.

      I’d be interested to know what F500 companies did when they transitioned from defined benefit to defined contribution. Did they allow those vested in defined benefit plans to continue?

  18. Wow 33 comments!
    I just wanted to point out re: fixed income comments-
    30-yr TBond is up almost 20% this year vs. 5% S&P 500
    Gains in 30-yr TBond vs. S&P since 1981 are staggering.
    Hey I don’t go by TBill for nothing!

    EDIT: 36 comments now

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Yea, TBill, smart guy, the older well fixed and the young wealthy rich, they’re doing fine (for them its the DO DA DAYs), and most everybody else is getting left behind. And that’s get another mess we got.

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        What to do?

        For starters, read up on the French Revolution as its told by Edmond Burke and Thomas Paine, in their great debate, as suggested by C’ville earlier, because that is right where we are headed and way we are going, having already roared thought the chutes, so it all downhill from here.

    2. LarrytheG Avatar

      @TBILL – something I’m not understanding… when you say Tbond .. is that Govt Treasury bonds or something else?

      1. Larry yes talking here about 30-year US Gov Treasuries, although you can buy other high quality long term bonds (corporate etc) which will also pay out well with cap gains if interest rates go down. I am sort of hoping Janet Yellens speech Friday sparks a bond sell-off (eg; low point buying opportunity).

  19. Duplicate post

  20. LarrytheG Avatar

    re: vesting and transition.. yes… FERS did that and I cannot recall where the line was but I “think” if you were already some number of years in – you could stay (you could always change no matter the years) .. then others with short time had to move but got to take what they had with them… then new ones had no choice.

    some folks moved just to get to the portable 401(K) and left for greener pastures … fairly quick…

  21. TooManyTaxes Avatar

    An interesting article and proposal in Forbes. “A Proposal For Allowing State Pension Buyouts” by Mark J. Warshawsky and Ross A. Marchand, both from GMU’s Mercatus Center.


    1. Cville Resident Avatar
      Cville Resident

      That’s an interesting proposal.

    2. LarrytheG Avatar

      well I’m not surprised it came from the Mercatus Center…

      they’re suggesting that you take money out of the already-short fund to buy people out? or govt has to come up with the additional money to do it? So the operating budget or the retirement fund – one or the other go south for a while to do the buyout?

      it looks to me that’s a recipe for ever more dire unfunding for the remaining folks… and might start a stampede of people who don’t like the handwriting on the wall..

      Now the Mercatus folks and ALEC would, no doubt, be having wet dreams over the exodus of those overpaid and excess got employees but this really walks and talks like what happened to Kansas…

      what happens is that you lose you best people first.. and keep the hanger-ons… the good people leave and go to better jobs.. the marginal ones just hang on for the ride..

      However – we do have 50 states and perhaps one will try it – maybe Kansas again.. 😉

      Buyouts are not unheard of. The Feds have done it and they’ve done it locally for school teachers… but – the big stopper is if people have employer-provided insurance and will lose their insurance if they take the buy-out… and can’t replace it…

      I think ultimately what has to happen is people are going to have to work longer… which is going to also have consequences for hiring new folks… and maybe that’s good.. they work longer, they retire and they don’t get replaced.

      1. TooManyTaxes Avatar

        Your argument has validity, removing cash has a negative impact. But buyouts also serve to limit the VRS’s future liability. Further, there is a real risk to beneficiaries that bankruptcy could occur at some point in the future. Taking a buyout could avoid a future haircut. The idea deserves review and study.

        1. LarrytheG Avatar

          let me point out what happens when schools do this.

          they entice their most experienced – and most expensive teachers to take the buyout.

          then they replace them with entry level teachers with little or no real classroom and practical teaching experience.

          imagine buying out your senior EMS or law enforcement folks … or other skilled and experienced personnel.

          If anyone thinks they can run govt with bottom-of-barrel help – they must think whatever the govt is doing is not worth it

          Ask Flint Michigan about that.

          1. TooManyTaxes Avatar

            Larry, I think you may have misread the article. The authors are talking about buying out pensions, not providing an incentive for employees to leave their jobs.

            I have a colleague who, along with her husband, had pensions from a company where they worked. The Company contacted them and offered a lump sum of cash in lieu of their deferred vested pensions. They took it. I know others (different companies) who turned down the pension buy-out offers.

            Many pension plans offer a variety of options. Lifetime annuity with no provision for the spouse (requires consent of the spouse). Lifetime annuity with 50% survivorship annuity. Lifetime annuity with 100% survivorship annuity. Why not offer employees the cash value of their annuity?

  22. LarrytheG Avatar

    no TMT – I caught the point of the article you supplied but it’s one variant of an overall program of reducing staffing and in turn their pension obligations – which is entirely appropriate if you are truly overstaffed but as a means to reduce pension obligations may well not be if you are pruning people needed to accomplish a mission and/or insure quality and quantity of that mission.

    If you are reducing and need to then I’m all for any/all inducements to accomplish the reduction. I’ve seen this happen in govt also when a program wound down… and some folks transferred, some left and some were induced to take early retirement but often those inducements are just what you’d get if you had reached retirement age – they just advance them so you can retire early.

    Again, totally in favor of that for things that must wind down or reduce

    the question about VRS is not whether the agencies on it are overstaffed – and there is a a bit of a misunderstanding if folks think the state of Virginia – it’s agencies are the bulk of VRS and that the State of Va has too many employees for it’s mission.

    Get my drift here?

    In fact less than 1/3 of VRS is State agency employees and even that number includes University employees, VDOT and Prisons.

    the actual core of true State level employees is probably 1/5 or less.

    The rest of it is the counties, schools, and multitude of authorities and other governmental organizations like Social Services, regional libraries and jails and water authorities, etc.

    So …. the “problem” is not overstaffing of state agencies as far as I can tell but truly one in which their pensions are defined benefit and need to transition to a hybrid model like the Feds did in 1987 – far past time to do it.

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