by James A. Bacon

Governor Bob McDonnell and the General Assembly made a big splash in the spring of 2012 when they crafted a long-term fix for the $55 billion Virginia Retirement System. While the commonwealth did shore up pension funding for state and local employees, it also created big headaches for local governments. Just as the state had to put more money into the system, so did the localities. With property tax revenues still lagging from the 2007 real estate crash, few were prepared.

As recently as 2001, the teacher’s fund administered by the VRS had been fully funded. But the Internet stock bubble crash of 2002, the 2007 recession and a decision by the General Assembly to temporarily short-change pension contributions in the aftermath of the recession pushed funding as low as 60%. The local liability amounts to an estimated $15.2 billion. That number could shrink if VRS investments perform better than expected — or it could be bigger if investments lag.

pension_liabilities3Fairfax County, the largest jurisdiction in the state, is facing a $2.7 billion liability. Another 15 localities are staring at obligations of $200 million or more. For a list of all localities, click here.

To make up for shortfalls in the retirement funds state and local governments alike are required to phase in significantly larger contributions. Local governments are between the proverbial rock and the hard place. The state makes the rules. As Susan Keith, employer representative program manager for the VRS, told me, “Local governments have no wiggle room. It’s non-negotiable.”

What does that mean in terms of cash flow? I talked to Brandon Hinton, budget director for Henrico County. For the teachers’ pensions, he said, the county will have to pay an extra $10 million in Fiscal Year 2015. The increase for general governmental employees will amount to $4.5 million. By comparison, the county is expected to generate $784 million in local revenue in FY 2013-2014.

Meanwhile, local governments are suffering a double whammy. Thanks to a recent ruling by the Government Accounting Standards Board (GASB), local governments will have to formally recognize those liabilities in their balance sheets. Those obligations could hurt credit ratings, making it harder and more expensive to borrow. “Moody’s recently put out a statement that two percent of localities nationwide could be downgraded because of this shift,” says Erik Johnson, director of government affairs for the Virginia Association of Counties.

Bacon’s bottom line: In the long run, this is money that local governments would have to pay in any case. State policy is dictating that they must pay now rather than pay later. Without question, that is the more prudent fiscal course. But it causes considerable pain. Five years into an economic recovery, Virginia localities still find themselves in a fiscal straitjacket — and I haven’t even mentioned the multibillion-dollar impact of the storm water regulations rushing through the regulatory downspout, a topic for a future post.

There are two ways to respond to the challenge. One is to posit the false alternative of either raising taxes or cutting services. That’s the Business As Usual way of thinking. That’s what we’re seeing in my home jurisdiction of Henrico County, which proposes to implement a 4% meals tax that would raise an estimated $18 million. But there is another way — reinventing government.

The coming decades could be a golden age for municipalities. New digital technologies and “big data” offer stupendous opportunities to achieve operating efficiencies. The revolution in online learning holds out the promise of reinvigorating our public schools while achieving cost savings. New fiscal analytics allow us to channel capital investment into more productive uses and to foster land-use patterns that yield more revenue in relation to costs. Will we follow the path of fiscal pain and austerity? Or will we choose the path of productivity and innovation? The choice is ours.

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10 responses to “Stressed Out: Pensions”

  1. Ah yes, let’s reinvent government. Big data costs big money because you now need bunches of highly paid analysts to pore over the results. Those analysts will also be in the retirement system that is already underfunded.

    When you have elected politicians that can never find money for governmental needs, while mailing out $millions for their pet projects, perhaps Business As Usual with a yearly payment is the best policy.

    Heaven forbid anyone would demand accountability.

  2. I’m not opposed to sharpening the pencil but I don’t think there’s necessarily obvious cuts – at least enough to match the costs and ultimately it’s a game about what services to cut and invariably, surprise, surprise, no one, least of all parents of kid sin schools. want service cut.

    the premise that there is a lot of govt fat on the bone – at the least, needs to have some evidence presented before insisting that govt play the blood-from-a-stone game.

    If a county has higher than average costs in an area compared to other counties (which can be verified by the Virginia Auditor) – then it gets to which services will be cut.

    I’ve watched the ying/yang locally as the local school board instituted pay-to-play and watched the back and forth between parents who resent that approach – and the same and others who believe that the govt has the ability to cut other stuff – but no one steps forward to provide the particulars of what to cut – … of course.

    If Henrico came right out and said the meals tax is to pay for pensions – what is it about 18 million a year for a budget that is what 20 times that number… what would the opposition come up with for 18 million in cuts?

    rough cut – each employee costs 50K… so 18 million would be more than 300 positions.

    name the 300 positions you would cut to save enough money to pay for the pension liabilities

  3. We have in our county – a citizens budget committee. There is some controversy about how they go about their work in a way that will not
    be interpreted as partisan or in opposition to individual BOS philosophies.

    It’s been a rough ride – in part -in my opinion – because the budget committee itself seems unwilling to do the really hard work actually looking into the budget and making recommendations. Much of what they have done to date has been – again in my view… superficial surface scratching.

    they seem loath to go after the schools which are 3/4 of the budget and too willing to talk about the cost of coffee messes for the employees.

    People who are serious about budget cuts – need to get into the game – and not pontificate from afar – again – in my view.

    I have yet to see a substantiative budget-cut proposal from any citizen group – in the Commonwealth but I’d love to be corrected … any takers?

  4. So is this citizens budget committee made up of the same sort of politically connected appointees they have down here?

    1. in theory – no…. it’s a true citizens committee – as much as that is possible given the differing perspectives on fiscal conservatism can be.

      That committee has always been of the fiscal conservative sphere.

  5. DJRippert Avatar

    No need for cuts. Just cap company-specific and industry-specific tax breaks at 5 years. This was put forth as a possible constitutional amendment by Chap Petersen last year (SJ281). Of course it was handily defeated in the State Senate. Only 12 senators voted to put the amendment on the ballot – 6 Republicans and 6 Democrats.

    How do you say “thank you” for a catered Thanksgiving dinner or a free trip to a Caribbean estate? With a tax break, of course!

    We have the slimiest, most corrupt, least competent state legislature in the United States. They will pass on their fiscal mismanagement to the localities but won’t cap tax breaks to their crony capitalist friends at five years.

    Utterly, totally and completely disgusting.

  6. Very useful post. Reinventing government overstates the need or prospects, but we could start by freeing citizens from party ideology, which certainly prevails here in Loudoun. Instead of a one-time, one-shot (all Republican) Government Reform Commission making half-baked recommendations, better a small on-going government accountability office working with staff and the public relentlessly to probe inefficiencies. Instead of abandoning volunteer programs (like sign removal) replaced by paid county staff, better to foster more volunteer efforts. And go for less palatial, simpler high schools and shared stadiums. Foster land use that avoids costs, so don’t pursue more residential development costing $1.60 in school and public service costs for each $1.00 in revenue. And maintain property tax levels without persistent and reckless politically doctrinaire efforts to cut them.

  7. I sense that mbaldwin and I might share some perspectives.

    For the pension problem – one approach might be to look at what you unfunded liabilities are – and to then target positions – over the next few years – that will not be filled when they go vacant of if they are filled – the positions will be “re-invented” – so that perhaps two positions – become one,etc.

    I would especially look at all areas that have seen improvements in technology especially information technology and yes – a strategic plan to identify positions that can be handled by volunteers especially in an assist mode.

    For instance in local schools, “para-assistants” can and are hired but there are many things that qualified volunteers can do.

    Volunteer staff needs a paid volunteer coordinator and defined job descriptions as well as performance standards and volunteers that want “real” jobs should be sought out. There is a mindset that “volunteers” are just filling time and don’t really want a serious job.

    Nothing could be further from the truth for some folks. they want a “meaty” job that actually delivers a valued benefit to the organization. They want to feel good that what they are doing is actually work that is needed.

    As the nation ages – there are lots of folks with major education and job skills that are being wasted… because we lack the vision to actual see them as an important resource to help the county actually save money and keep taxes low.

  8. cigarunner Avatar

    The state has not funded the actuarial suggested cost of VRS for 18 of the last 20 years. So voila the system is underfunded This goes for teachers also because of the Gen Assy ‘s actions

  9. I guess I think the “underfunded” problem is owned by both the state and the locality.

    There’s been some back and forth as to who should pay – but the State basically only pays for SOQ staff and if the locality wants more staff, they can pay.

    Left unresolved apparently are the locally-funded teachers – pensions.

    You can see why the state would feel a little unsettled each year in knowing how many localities would hire – in addition to the state-required SOQs.

    This actually goes to a bigger issue – which is who is responsible for hiring staff that exceeds what the State requires for SOQs/SOLS?

    Further – is the state on the hook for as many additional, locally-hired employees that are over and above what the state requires?

    I guess if I were the state -I would not fund the pensions of those who were not required by the state – and that would be the legitimate fiscal responsibility of the locality.

    tell me why I’m wrong.

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