Tackling Virginia’s Hidden Budget Deficit

Like a black hole, Virginia's hidden budget deficit is invisible but immense.
Like a black hole, Virginia’s hidden budget deficit is invisible but immense.

Restoring a pay raise for state employees outranks pension reform in the recommendations of the Commission on Employee Retirement Security and Pension reform. The legislative commission voted yesterday to prioritize a 3% pay raise for state employees that Governor Terry McAuliffe has proposed putting on hold in the face of $1.5 billion revenue shortfall.

House Speaker William J. Howell, R-Stafford, who chaired the commission, “struggled” to keep the panel’s focus on his own priority, creation of an optional 401(k)-style retirement plan for newly hired state employees, reports Michael Martz with the Richmond Times-Dispatch. Under the current arrangement, new employees have a hybrid defined benefit/defined contribution plan.

Virginia faces a long-term unfunded liability of $23 billion for the $70 billion Virginia Retirement System (VRS). The liability mounted in the past two fiscal years as the VRS fell short of an assumed 7% investment, although the VRS reported Monday that investment returns the past 12 months, spurred by a booming stock market, achieved 8.7%.

While pushing for the pay raise, the commission gave a watered-down endorsement of Howell’s priority, recommending that the General Assembly “consider” creating a defined contribution plan.

Bacon’s bottom line: In theory, the Virginia Constitution requires the Commonwealth of Virginia to balance its budget every year. The trick is, what constitutes a “balanced” budget? Accruing $23 billion (and that’s probably under-stating the problem) in unfunded pension liabilities technically does not count as “deficit spending.” Neither does short-changing the compensation of state employees, which creates major issues for recruiting and retaining a competent workforce when long-term Baby Boomer employees retire. But these shortfalls are only one step removed from a budget deficit. They pile up future obligations just as the state would if, say, it deferred maintenance on roads and highways year after year.

Legislators face hard, hard choices in a world in which sluggish economic growth and expanding Medicaid enrollment crowd out other spending.  Short of raising taxes, which would create a new set of problems, Virginia has no choice but to radically re-think government from stem to stern.

First principle: State and local governments should focus exclusively on core functions, excel at those functions, and abandon the rest. Corollary of the first principle: It takes good employees to achieve excellence. Second corollary: It takes competitive pay and benefits to recruit and retain good employees.

Second principle: State and local government should not rack up a budget deficit disguised as unfunded future obligations that will bedevil the next generation.

Govern accordingly.

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4 responses to “Tackling Virginia’s Hidden Budget Deficit”

  1. Employees, as one article showed, are underpaid 27%. That doesn’t include any pension, however when you figure that is underfunded, sort of tells a lot.
    I think the other option is to find out how much is being spent to pay for foreign workers to do jobs rather than Americans, because of the low pay. You have to pay for Visa’s. So add that to the cost.
    Look at admin salaries. I saw one place that showed a $10K increase in 20-30 years, but for admin the salaries were like $80K increases.
    It should also be that they change (not delete) EMTALA. If the person walks in on their own, they don’t need the ER. If they are not over 60 and just have a cough or something, they don’t need to be in the ER. If they sprained an ankle, go to to the urgent care.
    Things like that can save a lot.

  2. TooManyTaxes Avatar

    It’s my understanding that McAuliffe has proposed a one-time 1.5% bonus for state workers and teachers, rather than salary increases. This would not increase retirement costs or require local matching.


    1. LarrytheG Avatar

      the 1.5% only covers teachers who are SOQ. Other teachers, paid for by the locality have to come up with the 1.5% for them…if they want all teachers to get treated the same.

      1. TooManyTaxes Avatar

        And in Fairfax County, we have many positions that are not provided for in the SOQ. We also have a departing superintendent who convened a blue ribbon task force to look at cost cuts, only to reject every single one that was recommended. Dr. Garza’s “we cannot cut anything” approach was supported by the School Board. These actions, IMO, heavily contributed to the voters rejecting the meals tax, even as they approved all bond issues and provided a county majority for the Democratic presidential ticket.

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