Fairfax Supervisors Face County’s Monster Pension Crunch

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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27 responses to “Fairfax Supervisors Face County’s Monster Pension Crunch

  1. I call this the Chicken Little school of “Thought” because virtually no one seems to really know what 70% funded means in practical terms and lays it out pillar and post…. Nope.. it’s just some financial boogeyman lurking in the shadows waiting to pounce…..

    At least with Social Security – they’re actually laying out in precise detail what will happen nothing is done – payouts will reduce to 75% at some relatively date-certain timeline but few seem willing to actually make those changes even as they caterwaul about the sky falling. Instead, it’s almost like they WANT Social Security to fail to … “prove” that it’s a failure , a ponzi scheme by the govt.

    No such thing with Fairfax. By GAWD – the Govt.. yes.. the Govt HAS TO DO SOMETHING or else … bad stuff and worse might happen!!!

    So what exactly are the practical consequences in Fairfax if they don’t make those “relatively small changes” – and are they any more or less urgent as , say making “relatively small changes” to Social Security?

    Oh… and why is it a politically honorable thing to do to fix the Fairfax Pensions but no such love in fixing Social Security?

    That’s why I call the whole conundrum the Chicken Little School of Thinking.

    But you know – even though most everyone has no clue we do “trust” the folks telling us these things… No skeptics here!!!

    • Larry,

      Dale Stein, now retired, has spent his professional career managing pension plans for Exxon Mobil and Amtrak. He was most recently the treasurer for Amtrak, charged with making its pension plan reasonably sustainable.

      Over the last five years, he has spent countless hours analyzing Fairfax County pensions. He’s met with elected officials, staff, outside consultants and actuaries. He has also met with employee representatives from both the Schools and the County. He drew his conclusions after doing all this work. He work was reviewed and debated by the McLean Citizens Association committees and board of directors on multiple occasions. He had to answer a lot of hard questions many times.

      Real estate taxes in the County have, over time, risen at a rate that greatly exceeds the rate of increases in personal income, inflation or growth in county population. Moreover, the economy in Fairfax County has changed dramatically with little growth in high-paying jobs. Job growth occurs only at lower-paid service sector jobs. Many middle class residents have left and many low-income people have moved in. The rate of school children receiving free or reduced price lunches has jumped dramatically. There just aren’t enough DJRs in the county to pay the freight.

      The current pension plans, which include payment for Social Security for county retirees until they reach eligibility and for school employees until they die, are not sustainable. Pension-related expenses are also reducing the County’s ability to fund existing programs, much less start new ones. Pension expenses are also limiting the ability to grant raises to employees at a level needed to attract and retain good employees, most especially teachers.

      The County should have done this years ago.

      • “There just aren’t enough DJRs in the county to pay the freight.”

        And this DJR has no intention of sticking around a whole lot longer.

        I can live with high taxes and a good quality of life or low taxes and the inevitable inconveniences that come from limited government spending. Fairfax County has become high taxes and a poor quality of life.

        Sharon Bulova and the rest of the Fairfax County Board of Supervisors should all resign in shame.

        • You must not be reading the WaPo. It’s your duty to stay and pay taxes.

          You are correct about the declining quality of life and high taxes. Traffic alone is reason for many people to leave. Another big problem is the County refuses to enforce many laws especially with respect to Code Compliance.

      • TMT – you guys have elected governance. The problem is that you’re in the minority as most believe that Fairfax with it’s AAA rating and it’s taxpayers have more than enough money to pay it’s employees and their pensions.

        It’s ALWAYS about priorities – there will never be enough money to pay for everything that everyone wants! Choices are made!

        Having said that – it sure looks like to me that Fairfax is indeed doing what you advocate. They’re going to increase the retirement age, give less generous pensions to new folks and make everyone pay more into their pension. I’m quite sure it’s not “enough” of what you want though!!!

        The funny thing is.. I kind of got the impression that you’re a govt employee/retiree with great benefits also, right? I guess we all want our benefits but we are opposed to paying taxes to give others great benefits!

        We now have a 20 trillion debt because of that.

    • Wow, Larry, that’s a great idea. Let’s just pretend there is no problem at all and hope for everything to turn out fine!

      • Oh I DO THINK there IS a problem but what I am saying is that most folks don’t have a clue as to the practical aspect of it and so we play “Chicken Little” games… without ever really getting down to explaining what actually happens if Fairfax continues at the 70% funding rate.

        Do folks only get 70% who retire next year? How about 5 years? Can we say with some level of specificity what the practical effects are of a 30% unfunded pension plan?

        I think we should prefer this to Chicken Little.. we should all be better informed as to what it means – and what it does not mean.

        • I think what could well happen is the actual funding is used to pay pension obligations until it reaches a point where the money is insufficient to pay the pension obligations. Then some major cuts to pensions (both current & future) are negotiated with the possibility of bankruptcy if a new agreement is not reached.

    • Larry, what do you think an “unfunded liability” is? I think it is the present value of future liabilities minus the value of invested pension assets.

      • Thank you Izzo – you’re the first to take a stab at it.

        Yes. Now tell me how that plays out in practical terms if they leave it at 70% and don’t get it up to fully funded.

        That’s my question for folks. Do we REALLY UNDERSTAND what “unfunded” actually does mean in practical terms for pensions?

        We actually do KNOW – MORE for Social Security in that it actually has a 75-year look-ahead and it actually does provide a timeline for reduced payouts if nothing is changed.

        Take this back to Fairfax now and tell me what the practical effect is of delaying doing anything about the 70%. Does it mean people will not get their full pensions next year? How about the year after that?

        What exactly does it mean – if the 70% does not get addressed?

        Now my second question.

        There seems to be agreement that Fairfax (and others) need to “fully fund” their pensions EVEN if it means that they would reduce benefits, increase the retirement age and require higher contributions.

        But when it comes to doing something similar for Social Security, people say it “proves” that Social Security is a failed program and people should do their own retirement plans.

        So why not Fairfax? Why not just freeze it in place and tell the employees they have to come up with their own plans to supplement the “failed” Fairfax plan that will only pay out 70%?

        • Larry, I’ll give my view, but keep in mind I have not studied Fairfax. First, a difference between Social Security and pensions. Pensions have guarantees in legislation. For Social Security, as I think you know, the government has no obligation to pay anything beyond what is contributed. I think there would be a huge impact if promised SS benefits were not paid, but it has a different legal standing.

          The 70% funded means that only 70% of the amount required to meet the current, actuarial forecast obligations are currently invested. By current, I mean obligations that have already accrued. Obligations will continue to accrue if people are still in the system. What could be called catch up funding will need to be put into the fund at some future time to meet these obligations.

          Current pension recipients would be paid out of the fund, so if no new funds are put in, the position will worsen. If the pension fund is unable to meet obligations, it will have to be funded through debt or out of the operational budgets.

          I mentioned present value of obligations earlier. Present value would be calculated using a discount factor. The way many funds are run, they use an expected rate of return for the pension as the discount factor. Typical rates are 7-8%. Some have argued that, since pensions are guaranteed, the rate should be a risk free rate of return, which is lower. If a risk free rate is used rather than 7-8%, the unfunded liability will be larger.

          • Izzo – when you say the Govt “guarantees” one thing but does not another … I dunno guy… Are you saying that the Govt has passed laws that force companies and local/state govt to do something ?

            We’re still not at the point when you tell me – in practical terms – what happens if the 70% is not fixed. In other words – when do people not get their full pension “as promised” – even with the “guarantees”?

            Here’s my thing. We all sort of know the implications of “unfunded” in a really vague sort of way but most of us don’t really know the practical consequences of it and in my mind we ought instead of viewing it like some sort of financial boogeyman.

            Give Social Security credit – they are VERY transparent about the practical consequences of not fixing Social Security. They actually look ahead over a 75-year horizon ( do pensions do this?) and they tell when when benefits will be reduced if no fix is done.

            Now compare that to Fairfax – do they tell you when pensions will be reduced if nothing is fixed?

            Finally – are you familiar with the PBGC – the Pension Benefit Guaranty Corporation. Are they a Government agency? Do they take over pensions from the private sector and other government? Why? Do taxpayers pay for it? Why does it exist in the first place if pensions are “guaranteed”?

  2. I have seen a draft report on Virginia local government finances, as yet unpublished, that rated Fairfax’s situation only slightly better than Petersburg’s. Petersburg, which not long ago was on the verge of kiting checks and was begging the state for help. But yes, the situation is not that different than what is going on with Social Security, and the lack of political will is dead on the same. The consequence for Fairfax is what is being discussed – far fewer employees making far smaller salaries, or tax hikes or both. Just like the fix for Social Security is a changed and less generous CPI and removal of the cap on the tax (make all them millionaires pay!) Pay less, tax more – there it is.

    • Larry’s World is Crumbling,

      The Bern Rides to the Rescue,

      Nicolás Maduro’s Venezuela, his City Shinning upon a Hill,

      Words, Words, Ever More Words,

      Fidel, Fidele, Fidel,

      Welcome to America, America, America ————

      Thump ========

  3. The Democratic Socialists over at Blue Virginia are even taking notice, since union dues are the financial base of their political party….and they are the arbiters of the deal where local government employees are so richly rewarded for their Democratic votes! I guess they’re with Larry….

    http://bluevirginia.us/2018/11/video-police-educators-seiu-president-county-board-candidate-linda-sperling-all-speak-out-against-cuts-to-fairfax-county-pensions-for-new-employees

    • Unions and pension/health benefits go together – yes! It’s a time-honored tradition that people banding together to deal with their employer will usually get better treatment than if they try to do it as individuals!

      I know… it’s such a radical idea for some!!!

      but none of that has much to do with my real question here and that is beyond the Chicken Little aspect of “unfunded pensions” – do folks really understand in practical terms what that really means?

      Does 70% funded mean that from now on – retired Fairfax folks will only get 70% of what they were promised? If not that – then what?

      So what I’m really advocating is a more informed viewpoint so that we get beyond the Chicken Little stuff…

      In today’s “sharing” economy by the way – more and more workers are independent contractors responsible for their own pensions and each of
      them has to understand and decide what it means for them to “fully fund” their own 401Ks.

      And more and more employers, including the Federal Govt actually only pay a small defined benefit pension and the employee is responsible for their own 401k and how much it will pay out when they retire.

      And TMT will like this: Perhaps Fairfax (and others) should actually shift to a small defined benefit plan and then leave it up to employees to decide how much they want to contribute to their PRIMARY 401K retirement plan – just like the Feds now do with FERS!

      But again – my point here is that we toss around the “unfunded liability”, Chicken Little narrative without a whole lot of real understanding of it and I’m advocating that a Blog with the “wonk” stature of BR – ought to go that extra step and explain what the real ramifications of 70% funded verses fully funded actually does mean to the employees……. and us others looking on………

  4. Fairfax County needs new leadership. The current leadership fails to lead. That was obvious when this Board of Supervisors turned over the traffic problem, including the toll decisions, to an unelected group of business moguls who imposed the tolls so they could go anywhere they and their friends wanted without fuss or muss, and keep building on their properties and keep the traffic going to served their businesses a few more decades. The debacle has arrived earlier than they expected, including the pension problem. Now somebody else has to clean up the mess they have been creating for decades without any effective solution to fix it.

  5. Fairfax, to be sure, when compared to the rest of Virginia – RoVa – well..it’s a shining economic star that keeps Virginia solvent! Right?

    Without Fairfax – Virginia would be more like West Virginia!

  6. Dear All,

    What is the best jurisdiction, longer term, for working class families near D.C. Are there any? Just how bad could things get in Fairfax County?

    Sincerely,

    Andrew

    • Andrew says:

      “What is the best jurisdiction, longer term, for working class families near D.C. Are there any? Just how bad could things get in Fairfax County?”

      Andrew, I do not know how to answer your three questions. But I do think that we are reaching a potential hinge point where we might now begin to turn things around in N. VA.

      For example, Arlington County had to reach a certain point of alarm, before it clearly saw the threat to its community, and gathered the will to take its destiny in its own hands. Its core, its revolutionary downtown, lay in ruins, drained by predatory, out of control, poorly planned growth on its outer perimeter, amid an unexpected influx of immigrant refugees from S/E Asia. That was the bad news. Or seemed so at the time. Over time, these problems proved blessings in disguise that sparked Arlington’s Renaissance.

      Hence, disguised good news sparked dormant ingredients of power that needed to be mixed into potent solutions that, so armed and planned, could pull Arlington up into success again. These latent ingredients included:

      1/ Still excellent location across river from the Nations Capital,
      2/ Still workable outline of a successful modern community,
      3/ Strong mixed use housing stock for all income groups, single housing, low to mid-rise housing for wealthy, middle class, lower middle class.
      4/ Skilled, experienced, confident, energized workforce and governance,
      5/ Nearby powerful engine of growth in Federal government,
      6/ Rising new technologies that could drive a modern society
      7/ A Metro underground subway that could be made a reality.

      Armed with these ingredients, with the stars also aligned, Arlington regained its footing, its financing health, and its ability to power itself into the future.

      I believe that today we have the potential to begin to turn all of Northern Virginia around, as we did Arlington County last time.

  7. My supervisor John Cook (repub) has decided not to run next time.

  8. Lets look at “the city’s side vs employees” in the go go 90s pensions which were closely and still are tied to the stock market were bulging with profits, bringing in double digit returns for their counties and cities. Many looks at that huge influx of funds as a reason to not contribute the normal contracted or requested amount into their pension systems, since as noted the system was supposedly over 100%. Seeing these additional funds many employee groups worked to increase the benefits or scale down issues like age/service and localities agreed, in many cases, but seeing this as a political hot potato year after year, and not seeing the situation changing, they underfunded THEIR contributions for years, and the stock market crashed in 2000 and 2008, and worse yet real estate taxes crashed too, leaving localities scratching for funds and putting off pension contributions saved the budget for many, with the promise “the full faith of the “state, county or city” will make up any future shortages”. So, in true political fashion, now a new set of politicians has taken office, and see no need to hold true to promises of the past. As is always said, you pay me now or you pay me later, and bringing NEW employees in at a lower rate is not going to solve current issues, because they won’t retire for decades, and while the actuarials may cut the current costs a little, these employees will at some point demand that their benefits be restored, as those who suffered the same treatment in the Great Recession of the 80s demanded in the go go 90s. History repeats itself, and our politicians who are only worried about the next election are doomed to repeat mistakes of the past, over and over again.

  9. Disclaimer- I am writing this as a person with no special knowledge of Fairfax’s situation, only an understanding of what these numbers mean from a local government practitioner’s point of view. I only use Fairfax as an example, since they are the subject at hand.

    To those who would like to understand the financial implications of the liability, Fairfax County has an excellent powerpoint –
    (https://www.fairfaxcounty.gov/budget/sites/budget/files/assets/documents/retirement-system-review/retirement-system-review-5-22-18.pdf)
    that shows the changes that the County has already made in order to meet the shortfall created by the funding liability, as well as the results of a variety of change options. They have, just as their employees have said, closed the liability gap in the different funds substantially. This is why the employees don’t see the need for a change.
    However, the Board has accomplished this feat by more than DOUBLING the County’s contribution over the last eight years. The Board is acting responsibly to address the shortfall already present, while at the same time acknowledging that they need to make a new contract with new hires so that the long term amount for contributions can be managed. This liability and the balloon of the current employees under this plan will take many years to fix. Just as with the changes for VRS, the liability was not created overnight; the solution will not occur overnight either. However, in order for Fairfax to protect its stellar bond rating and have clean audits, they must address the liability. And let us not be too hard on any localities that have this issue; people live much longer than these tables were designed for. And the awareness of the liability occurred with the change in accounting standards that required localities to quantify these and address them. The standard is good. But it has been a painful transition for many.
    Larry- As stated earlier, the 70% is the gap between what is needed to fund their commitments and what they have. The reason it must be addressed now is because of the bond rating and the need for clean audits. If Fairfax were to remain at 70% without measures to address it, they risk decreased bond ratings, which would cost them even more money than the expense of funding the full retirement. Does that help? The issue at play is that they MUST fully fund, or risk worse consequences. And fully funding is costing them more than they can afford forever. At some point, there must be a sustainable amount in the budget for benefits, and it has to be a stable amount of increase.

    • Sara – your comment increases my concern, despite your obvious knowledge.

      People always say that we never see these regular financial crashes coming, yet they always come, even though they always come “totally unexpectedly”, and these disasters strike unexpectedly about every ten years, and most always do, like a lunar cycle.

      Now I fear we are becoming less resilient that we’ve been since the great depression of the 1930s, that required a war to fix. The 2008 recession was far worse, in my view, than it needed be, because it took so long to recover. Why? And indeed many folks are yet to recover and many never will, no matter what experts tell us. Why? Plus rating agencies are wrong as often as right, frequently more wrong than right. Why? These are holistic problems that extend far beyond actuarial tables, even balance sheets, however important those tables and sheets may be. Here, a 1% fluctuation in GNP over time can mean the difference between great prosperity and financial collapse.

      There is a lot more at play here than numbers on a sheet. Margins vanish. Surprise! Surprise. Most every time. Why?

  10. Sara – very thoughtful comments.

    “[P]eople live much longer than these tables were designed for. ” A key factor that many people ignore. It costs a lot more to fund a pension that lasts for 30 years than for ten. And those cost assumptions were not built into the Fairfax County pension plans when current and soon-to-be retirees entered the system. And certainly not when the BoS and School Board kept enriching the programs. One can make a good argument that taxpayers never signed up to fund a pension plan whose costs would be much higher because of unforeseen increase in pensioner lifespans. There is equity on both sides of the argument.

    Doubling the County’s contribution to fix the gap is likely quite necessary. But at the same time, it also takes away from other programs and forces real estate taxes even higher.

    Finally, another point of equity. By continuing very generous pension plans at current levels and extending the same benefits to new hires, the County would be forcing county residents, most of whom do not have defined benefit pension plans, to pay higher taxes and forego desired services to benefit those with very generous defined benefit plans. At some point, this becomes very unfair. As I wrote earlier, the County does not have enough high rollers to pay the freight. The tax burden falls on many whose income has not been increasing significantly and who are generally responsible for most of their own retirement.

    • TMT- The defined benefit pension plan is certainly a holdover from another time, when people retired and then did not live another 40 years. The cost assumptions, which have now been updated, show the real anticipated cost today. It certainly isn’t what people believed they would be paying when these programs were implemented. And it is a fair question to ask as to whether taxpayers should pay it. Fairfax seems to be trying very hard to find a middle ground that upholds their commitment to their current employees, while recognizing that there needs to be a new contract going forward. In my work, when both side are a little angry, and nobody thinks you have done enough, usually means you have found the middle ground.
      And yes, your second paragraph is exactly the quandary of the Board of Supervisors- if they do not address this issue, they have ever less money for other programs and higher taxes, as well. And your final point has another question- will you attract better talent with lower wages and better benefits or by paying market rate and market benefits?
      The questions you ask are all the political side of the equation. I tried to stay away from that and just address the mechanical ones. That’s the staff person in me. I work for the political types. I present data and options. They make the hard decisions. 🙂

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