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.
Fairfax 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.
