Uh, Oh, Another Bad Year for VRS Investments

by James A. Bacon

The Virginia Retirement System earned 1.4% on its $82 billion investment portfolio in fiscal year 2020, far below the long-term average of 6.75% the VRS Board of Trustees assumes that it will earn over the next 30 years, reports the Richmond Times-Dispatch

VRS investments have returned 5.2% over the past three years, and 4.8% over the past five years, but the 10-year record looks better at 8.1%.

One year’s poor results are not a cause for concern. Markets go up and down, and so do investment returns. The long-term picture is worrisome, however. The ten-year VRS record reflects investment results during one of the great bull markets in both stocks and bonds in U.S. history. Many analysts expect returns in future years to be lower as the Federal Reserve Bank pursues a near-zero interest rate policy to goose the U.S. economy through the COVID-19 crisis and aftermath. There is no chance that investment performance over the next 10 years will replicate that of the past 10 years. To the contrary, if inflation picks up, as the Fed is aiming for, that could depress stock market multiples and stock prices.

If future VRS investment returns lag the actuarial projection of 6.75% yearly, state and local governments will have to make up the difference through bigger contributions to the retirement funds. “The lower returns will eventually require greater general fund [budget] obligations,” Secretary of Finance Aubrey Layne told the RTD Wednesday.

Bacon’s bottom line: How many billions might state and local governments have to cough up? A year ago, the VRS calculated that unfunded liabilities for the pension plan for state employees amounted to $6.3 billion, while unfunded liabilities for the teacher plan was $12.8 billion. Given the sub-par investment performance this year, total unfunded liabilities could exceed $20 billion in VRS’s next recalculation of the numbers.

It’s not clear to me when that bill will come due. I haven’t seen any reporting on the point at which VRS begins drawing down its assets to pay retirement benefits, or the point at which the fund runs out.

The Social Security Administration publishes an annual update on the outlook for the $2.8 trillion Old Age and Survivors (OASI) Trust Fund. In its most recent forecast, the OASI fund will run out in 2034 and, barring changes in legislation, ongoing tax income will be sufficient to pay only 76% of scheduled benefits. What are the comparable numbers for the VRS — how long will the $82 billion in assets last?

I don’t know of anyone asking the question. Certainly, the general public doesn’t have a clue. I’ll bet most members of the General Assembly don’t either, even as they debate legislation that would make it easier for public employees to  organize, negotiate for better benefits. and drive up future obligations.

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44 responses to “Uh, Oh, Another Bad Year for VRS Investments

  1. I plan to offer my services as a investment consultant to VRS. I have no training or experience in financial investment, but I think I could do better than the agency’s highly paid analysts did last year. All their efforts resulted in an increase in the Fund’s value of 1.4 percent. I would have parked the money in an S&P 500 index fund and earned over 5 percent.

    Not only would my advice have resulted in the Fund increasing more in value, the agency would have saved a ton of money in administrative costs. I would have charged a consulting fee of only $100,000, which is probably half the average compensation for each of their investment analysts.

    • The 60-year S&P is roughly 7% +/- 15%. Had you been invested in the S&P between 2001 and 2010 you would have had less than 2% annual average return. As a general rule of thumb, people believe that bonds provide a hedge to stocks but there is only a 0.03 negative correlation. So for the most part, if you’re losing in stocks, you’re losing in bondS too.

      In the late 90s, the Texas Retirement System had stupidly gotten way into Disney. Oh, they had been flying high. Then, the Southern Baptists discovered that Disney was hosting a gay cruise. Opps.

      It’s harder than it looks. That VRS made a 10-year annual average of 6.75% while (hopefully) under cautious restrictions is GREAT.

      Not having looked at their requirements out 20 years, I’m guessing they will meet obligations at 2 to 3% on average.

      • “The 60-year S&P is roughly 7% +/- 15%”

        Excuse me. I didn’t finish that. The last 60 years of S&P annual returns are modeled as a random variable of a normal distribution with mean of ~7% and standard deviation of ~15%.

      • Yes. 2001-2010 taught a certain someone that I know that it wasn’t a good idea to take the half of your ex-husbands pension you got in the divorce as a lump sum and put it in the stock market only to sell it at a huge loss.

        Taught? What am I talking about, she didn’t learn a thing. It was that no-good financial advisor that made her do it. Probably put a gun to her head.

        Now I understand why the ex would never let her have a credit card.

  2. I’m sure most of those analysts feel overworked and underpaid

  3. Baconator with extra cheese

    I agree with Mr. Dick above…
    I invest in Vanguard ETFs and DRIP the dividends and I returned 68% over the past 5 years in one account with no additional input… it was a rollover account.
    And these are the highest paid state employees? Dang… I’ll take the job for 90k a year plus state benefits.

    • Congratulations. You have discovered the Scott Burns “Couch Potato Portfolio”. Its primary rules are buy a X% in a board market index fund and (1-X%) in an intermedite treasury fund then rebalance once or twice per year and DON’T PANIC.

  4. Damn. If both Social Security and VRS start shorting us in a couple of years, I may have to send my wife back to work in the classroom…..Thank goodness we have those Landmark Communications pensions, eh Jim? (Inside joke….)

    That was a fairly pathetic return. Time for a change.

  5. I get my first VRS check next month! Can’t wait. Unfortunately every dime of it will go to cover my wife and daughters insurance premium.

  6. Pensions for public employees create numerous moral hazards. First, since most citizens don’t have a pension the decisions made by public employees are sometimes divorced from the reality of the people public employees are paid to serve. While many worry about the value of the 401(k)s the public servant has no such concern (although she probably should). Virtue signaling legislation to make Virginia energy 100% renewable by some arbitrary date doesn’t threaten the value of the stocks held in a 401(k) account for public employees because they have pensions rather than 401(k)s.. The fact that air is fungible and other states and countries have no intent in following Virginia / liberal America down the economic rabbit hole has no consequence for those whose retirements are pledged through the taking of others’ property. The second moral hazard is employees staying at a job they dislike because leaving too soon will cost them their pension or some significant component thereof. How many people at the local DMV look like they are sleep walking through their jobs waiting for the magic day when the pension fully vests? Finally, pensions prevent managers from firing losers. Who wants to send dear old Edna to the unemployment line when we can wait another 4 years for her full pension to vest?

    Let the government employees join the rest of us in the real world of risk – reward where at least part of the retirement plan is self-funded and all of it is self-managed. Retirement plans should be portable.

    Oh, a fourth moral hazard – pension benefits can be increased by politicians to get the votes of government employees while not fully affecting the current budget. Matching contributions to 401(k)’s have to come out of today’s budget.

    • James Wyatt Whitehead V

      Teachers hired in the past 10 years really don’t get much of a parachute now from VRS. The new plans really are not that good. They had better save. Glad I was grandfathered in.

  7. Turn it over to the people who control UVa’s endowment. “Better than most”

    Be fair now. Are they encumbered by investment restrictions?

    • … and if they are, what does that say about pension plan management? “Don’t blame you, don’t blame me, blame that dude behind the tree!”

      Ed Demming liked to say its the process, not the people. Of course, the process was created by politicians and government bureaucrats

  8. Much ado over nothing… if the current administration in Washington can run deficits to pay tax cuts why not other things?

    Social Security is doing it right. Tell folks what is going to happen when the trust fund itself is exhausted and it pays out what is coming in – and look at the options available and choose one or several or none. At least SS has told everyone up front where we are headed.

    On the State Pension – they could do a little more like SS which is tell everyone – and especially those getting pensions or expecting to get them – again – what the options are and let choices be made.

    Both SS and the State pension fund are run more responsibly by unelected bureaucrats than the Federal budget is our elected.

  9. It’s always easy to criticize using one year’s result. The past year is clearly not usual and the market has been driven by too much cash and the attractiveness of the technical sector. A better comparison would be to compare VRS’ performance to the S&P 500 over the past 10 years.
    VRS could benefit from some competition. Why not give state employees the option of having dollars be invested in VRS or a 401(K) of their choice?

    • Even as inexperienced as I am, I realize that comparisons should be made over a longer period than one year. I also realize that a large public fund should not put all its money in one basket. However, Ed Burton, a former long-time member of the VRS board and a professor of economics at UVa., also has been highly critical of the board’s recent asset allocation strategy. He contended this summer that VRS should have earned closer to 8 percent, based on the S&P 500 and Barclay Aggregrate Bond Index. He characterized the VRS result as “a pitiful return, during a period when markets were very favorable.”

      It doesn’t inspire confidence that VRS first reported an annual return of 2 percent and then had to amend it to 1.4 percent. The 2 percent estimate was wrong due to a faulty calculation made by the chief investment officer.

    • No, Mr. O’Keefe. They suck at this. Luckily for them, most retirees are clueless and believe the state will pay no matter what happens to that fund. If the retirees felt threatened, this board would disappear in a whiff of smoke.

      • So if you have money in non-govt investment funds – do you have any real assurance/confidence in your earnings ? Truly? Do you really have any idea what your periodic statements will show?

        And finally, do you think the government is riding herd so that you don’t totally lose your investments to skulduggery?

        you do rely on the government to protect your investments, right?

        • No Mr. Haner they don’t. If you check state fund rankings, Virginia is about in the middle. While I would like to see VRS in the top 10. I sure as hell would be upset, as a taxpayer, if it was in the bottom 10.
          I’m not sure what Ed Burton’s criticism is or his recommendations but I know that being a sideline kibitzer who doesn’t bear the responsibility is a lot easier than being responsible to protecting state employee pensions and managing about $20 billion.

  10. Virginia now has a hybrid plan for employees, which mitigates some of the moral hazard described by Don. The employee pays 4 percent of salary, which VRS manages for the employee and, at retirement, the employee is eligible for a defined benefit. The employee has to also make a payment of at least 1 percent (which the state matches) into a 401 (a) account, which the employee manages. The payment from that account at retirement is dependent on earnings.

    This plan is effective for employees hired after January 1, 2014. Employees hired before that date (like me) have an old-fashioned defined benefit plan, for which we contributed 5 percent of our pay each month. The state contribution is calculated for each biennium. Currently, it is 14.46 percent of salary for each employee. (This the rate for general state employees. There are separate plans and rates for teachers, State Police, other law enforcement employees, and judges.)

  11. I thought the State had done that – and the Feds did it some time ago.

    Yes – let workers have a portable 401K plan and give them a portable health insurance plan also and watch what happens next if they can take another job and take their 401k and health insurance with them.

    • The hybrid retirement plan has some portability, I understand. Because it was not applicable to me, I have not studied it in detail. The state health plan is not portable. That is one reason some state employees stay on for a long time, especially in rural areas. The health plan is a good one that is probably not equaled by plans offered by private business in rural parts of the state.

  12. and brought to you by the same folks that want to manage a brave, new Magically Monetary Theory driven economy

  13. No way we should be adding to the deficit by paying tax cuts… Alice in Wonderland…

    • Revoking the SALT caps would be a tax cut … right?

      • It would, but why stop there ? Why not deal with ALL tax-advantaged subsidies


      • Why do you like paying taxes on taxes?

        Fix tax inequities. Cap mortgage interest. Fix other inequities like Cafeteria 125 plans that allow CEOs to pay their healthcare premiums with 37% tax money while the janitor pays the same premium with 15% tax money.

        • Well I don’t like paying taxes on taxes but it’s the price we pay for tax expenditures and other “tax-advantaged” bennies, no?

          what about income that is taxed twice, three times -once by the Feds and again by the States and in some place once again by the locality?

          Not a question of not taxing… the bills are already do – how do you want to pay them?

          What Government do is not tax income over and over – nope – they tax transactions… each time…

          sorta like Value-added…taxes.. 😉

          • Well, it’s an income tax. But the ONE deduction that should calculated out should be taxes.

            Prior to the SALT limits, you caculated Federal AGI subtracted state and real estate taxes and others. Then you use FAGI to calc state tax. If you subtract re tax from the Va AGI then you won’t pay state tax on re tax

          • in exchange for fully taxing other things that are not?

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