State employees: stuck between a rock and a hard place.
by James A. Bacon
Yesterday I referred to Gov. Bob McDonnell as an “incrementalist reformer.” That’s not entirely fair. Some of his reforms come in pretty big increments, like his proposal to put the Virginia Retirement System back on a sound actuarial basis. If he can get his plan enacted over the inevitable objections of state employees and their allies, he will have made a major contribution to the long-term fiscal health of the commonwealth.
McDonnell balanced the budget two years ago by shorting the state contribution to the VRS to the tune of $620 million. Now that the state’s financial condition has improved, he plans to make up for that under-funding by injecting $2.2 billion in state and local funds into the VRS during the next two-year budget. Yesterday, he also announced a package of structural reforms to the retirement plan that would close the $19 billion unfunded liability by another $5.1 billion. Public employees would pay an additional 1% of their salary and receive a little less in benefits. (See this press release for the details.)
Says McDonnell:
As governor, I must be able to look state employees in the eye and promise them that their retirement benefits will be available when they choose to retire. Today I can’t do that. By enacting these reforms, we will be able to move closer to guaranteeing that security for VRS contributors. I will not leave this issue to be solved by a future governor. We are all in this together, and this is a basic matter of math. The simple truth is our state retirement system just will not work without both sides of the equation, the employer and the employee, contributing more in the years ahead.
McDonnell would sweeten the deal for state employees by funding a one-time performance bonus of up to 3% in FY 2013. A spoonful of sugar may help the medicine go down, but the medicine still tastes bitter. The bonus is a one-time deal. The extra 1% contribution lasts an entire career. Moreover, it comes atop several years of zero pay raises for state employees. The only consolation for state employees is the knowledge that the reforms will avert a major pension-funding crisis that could jeopardize retirement benefits at some unpredictable time in the future.
I expect critics will pursue two lines of attack on McDonnell’s plan. First, they will say the reforms will reduce the state’s competitiveness in hiring and retaining talent. However, with Virginia unemployment stuck at well above 6% and expected to linger there for a long time, it’s not as if there will be a rush out the doors. If the economy improves and state workers begin seeking employment elsewhere, tax revenues will be rising as well and the state will be able to afford increasing pay or juicing benefits as needed. I’m not worried.
Second, the class warriors will decry the benefit cuts as another attack on the middle class. They won’t advocate cutting other spending programs, so that leaves only the alternative of raising taxes… presumably on the rich. I don’t have the time or space here to re-hash the old rich-are-getting-richer-while-the-poor-are-getting-poorer debate here. Suffice it to say much (not all, but much) of the increasing wealth gap is an illusion. The income of the “top 1%” has crashed since the recession, wiping out much of the gap. Longer-term, changes in the tax code coaxed the rich to declare more income rather than hide it in tax shelters. (See this Alan Reynolds piece for the best discussion I’ve seen on the subject.)
The fact that Virginians, like all Americans, are feeling miserable right now can be attributed to the failure of government policy at two levels. First, the Era of Mass OverConsumption, built upon the accumulation of debt, is unwinding. For what it’s worth, both political parties encouraged MassOverconsumption — no one escapes the blame for it. More to the point, there is no way to avoid a painful readjustment. Second, President Obama’s economic policies are killing jobs. Obama inherited a bad situation… and made it worse.
The way to restore Virginia’s middle class is not by raising taxes to pay more generous benefits to state employees. The way to improve the lot of state employees is to create the basis for a sound, growing economy that generates more tax revenues that the next governor can share with the state workforce. That’s the approach McDonnell is taking, and I applaud him for it.
