Virginia Pension Liability Gap: Still Worrisome

Graphic credit: Pew Charitable Trusts

Another year of tepid economic growth and another year of no progress on Virginia pension liabilities.

Nationally, the gap between liabilities and assets for state pension systems grew 17% in fiscal 2015, reaching $1.1 trillion, according to an annual survey by the Pew Charitable Trusts. Under-performing investments was the biggest driver, accounting for $125 billion of the gap. But even if investment performance had lived up to expectations, the national gap would have increased $30 billion anyway.

Virginia, which prides itself on its AAA bond rating, is hardly an example of fiscal rectitude compared to other states when it comes to funding its state and local pensions. On the one hand, the Virginia Retirement System (VRS) assumes a modest 7% compounded growth rate for its investment portfolio, while state pension plans on average assume a 7.6% annual return. Virginia’s conservative assumption protects it against the downside risk of disappointing investment returns.

On the other hand, Virginia has not been injecting as much money into the pension as needed. Pew has constructed a measure — net amortization — that tracks whether public pension contributions would have been sufficient to reduce unfunded liabilities had portfolio returns met investment assumptions that year. Explains Pew: “Plans that consistently fall short of this benchmark can expect to see the gap between the liability for promised benefits and available funds grow over time.”

According to Pew’s calculations, Virginia needs to contribute $2.5 billion a year. In 2015, the state did meet that goal — actually, it exceeded the goal by 1%. But 2015 followed a dismal shortfall (visible in the chart above) in 2014.

Virginia’s “funded ratio” was 75% in 2015, about the same as the previous year. That is marginally better than the 72% for the funded ratio of the nation as a whole. Of course, that national figure is skewed by the horrendously low ratios of Kentucky, Illinois and New Jersey, which are more or less destined by the iron law of mathematics to become the next Puerto Rico.

Virginia needs to do better. At the current level of state contributions, the VRS is at the mercy of the markets to perform as expected. If we’re lucky and maintain contributions, things will work out. If not, we’re in for a world of hurt.

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15 responses to “Virginia Pension Liability Gap: Still Worrisome”

  1. LarrytheG Avatar

    which makes one wonder why candidates for office who bill themselves as fiscal conservatives are advocating tax cuts….base in part on cockamamie ideas of “dynamic” scoring.

    Sounds like the polar opposite of fiscal responsibility to me.

  2. djrippert Avatar

    Funny how the sharpies at UVA have no problem growing their slush fund at a terrific rate while VRS suffers from sluggish growth. Over the last 5 years the S&P500 grew at an annual compound growth rate of 11.08%. My 89 year old Mom managed better than 7% with her portfolio. Once again gub’mint can’t find its ass with both hands. In the midst of a roaring, long running bull market they can’t get a market average return? I’ll be voting for a tax reduction candidate this November. I am tired of my hard earned money being taken to fund gub’mint incompetence.

    1. Far be it for me to defend government performance, but we have to be careful comparing the performance of a diversified $50 billion portfolio with that of your mom’s stock market portfolio. To hedge against volatility in stocks and bonds, pension portfolios invest in real estate, hedge funds, private equity and other stuff. I suspect that you’ll find that the VRS stock portfolio performed in line with the S&P but other sectors dragged down overall performance. When stocks have a bear market again (as they inevitably will), the VRS won’t be as exposed as your 89-year-old mother is. At that point its diversification strategy should pay off.

      The problem is that the Federal Reserve Board’s near zero-interest rate policy has goosed stock market performance but has depressed pension in other investment categories. A new era of rising interest rates could create different winners and losers.

      1. djrippert Avatar

        So, VRS is both too big to fail and too big to succeed. The Norwegians have a $900B wealth fund. They’re adjusting their equity percentage from 60% to 70%. How many years in a row does the Fed have to hold interest rated near zero before VRS makes some changes? Funny how UVA managed to invest their slush fund to take advantage of the long running realities of the bull market.

        When the stocks go into a bear market again my Mom will sell her shares just like she did in 2008.

      2. LocalGovGuy Avatar

        This is correct. You simply shouldn’t manage $50 billion like you manage $50 million and you shouldn’t manage $50 million like you manage $50 thousand. Capital preservation ratchets up the larger the amount.

        If you want to have an honest pension reform conversation, you have to first acknowledge what a pension is. Its deferred earnings for a payout tomorrow.

        It’s been well-established that current state and local gov’t salaries are not very competitive with the private sector. The state’s only incentive in HR is its pension plan.

        I can understand djrippert’s sentiments, but I also believe in fairness. I also want the professionals who work for the state (attorneys general, docs, finance folks, engineers) to be competent and not the “bottom of the barrel”. I don’t think it serves taxpayers to have a poor civil service, an there are a lot of hidden costs that come with high turnover if you start to make your workplace completely unattractive. What type of compensation package would “make up the difference” for state employees if the state transitioned to a defined contribution plan?

        My own thought is: If you’re vested, you can stay on the defined benefit plan. Otherwise, the state should look at a “cash balance” plan similar to Nebraska.

  3. LarrytheG Avatar

    I guess you can call VRS .. risk adverse.. especially since more than a few folks including some pension funds had their butts handed to them on a silver platter during the last great economic unpleasantness… eh?

    but.. why don’t we hear Conservative candidates for Gov in Virginia point out that we have unfunded pension liabilities – and suggest a plan to deal with them instead of promising tax cuts ?

    it’s almost like we’re advocating that govt actually BE incompetent.. they have unfunded liabilities and instead of dealing with them responsibly – we promise tax cuts that will make it even harder to pay state obligations.

    how is that fiscally responsible?

    1. djrippert Avatar

      The pensioners will have to take haircuts in the payout – just like I’ll have to take a haircut in the payout from Social Security when the trust fund is depleted. If the Federal Government doesn’t consider its obligation to pay me what it claims on the SS website then why do I have to consider it an obligation to pay state government retirees what they are expecting?

      1. LarrytheG Avatar

        the trust fund is not what funds Social Security. FICA taxes do.

        All the trust fund is – is the surplus that was built up over the years when Ronald Reagan agreed to increase the FICA taxes – in anticipation of the baby boomers retiring.

        Unlike other Federal programs – like Medicare – Social Security – if the suggested fixes are not enacted – will automatically reduce payments but the amount of reduction is on the order of 15% on a worst case basis if nothing is done.

        Easy fixes like increasing the retirement age and doing away with the chained CPI.. are available but have been opposed by those who are
        ideologically opposed to the concept of Social Security itself – the same folks who refuse to deal with health care and immigration and prefer a gridlocked govt instead.

        Here’s what I do not understand about the State Retirement system.

        Is there enough money in it right now to pay 100% to all current retirees?

        If we judge it like Social Security – at what point will VRS not be able to pay 100% of all retirees? What is that year? We know that year with Social Security so what is it for VRS? Is it 2020 or 2030 or 2050 or what?

        can any of us discuss this with any intelligence at all if we don’t know those facts … and how much the annual shortfall is that has to be made up?

        Without that info – it just becomes an ignorant blatherfest. right?

  4. djrippert Avatar

    Taking a blow dryer to snowflakes …

    Snowflake contention: Bush cut taxes and the deficit spiraled out of control. Cutting taxes makes the deficit go up.

    Reality: The Bush tax cut, the Clinton recession and the war on terror caused the deficit to go up at first. However, as the economy improved the deficit steadily dropped from $413B in 2004 to $318B in 2005 to $248B in 2006 to $161B in 2007. Then came 2008 and the so-called Great Recession, the bail outs, etc and the deficit ballooned. Despite raising taxes, ending wars, quitting the bail outs and cutting defense Obama’s 2016 deficit was almost 50% higher than the biggest deficit GW Bush ran prior to the 2008 recession.

    Repeat after me … the deficit was shrinking after the Bush tax cuts.

    Crappy economic performance causes deficits, not tax cuts. You want economic growth in Virginia (and everywhere else in America)? Declare a tax amnesty (with strings attached) for the $1T+ in offshore cash held by US corporations.

  5. LarrytheG Avatar

    Voodoo economics.. cut taxes.. increase revenues..

    ask Kansas about that.

    there is a reason why CBO does not do dynamic scoring …. because they KNOW it’s Voodoo economics…

    when you cut taxes -you cut jobs.. also.. yes you make them up on the non-govt side but the net increase from productivity is not calculable.. or else the CBO would score dynamically – …

    If you cut DOD – you hurt NoVa and Hampton … not help them… with private sector growth…

    just FYI –

    deficits blew up after the great recession

    and point two – POTUS do not cause deficits – Congress does.

    so what did Congress do to blow up the deficits since Obama and Congress agreed to the sequester?

    oh wait..

  6. djrippert Avatar

    “so what did Congress do to blow up the deficits since Obama and Congress agreed to the sequester?”

    They didn’t do anything. The economy improved.

    1. LarrytheG Avatar

      do you count the sequester as not doing anything?

      you mean all those folks complaining that it hurt NoVa are “snowflakes”?

  7. TooManyTaxes Avatar

    There is a real risk of bankruptcy where public sector pensions pay high benefits, but are grossly underfunded. While a bankruptcy court can try to protect pensioners, the federal bankruptcy law preempts state laws and can result in cuts to existing pensioners and those with vested rights. Bankruptcy is bad for everyone, so making reforms that reduce the costs for public sector pensions can be beneficial to many people.

  8. LarrytheG Avatar

    Certainly both public sector and private sector pension plans can and have gone bankrupt but private sector plans typically fail when the company itself fails.

    but States do not “fail” like companies do… and what does it really mean?

    Even places like Petersburg still have pensions for their employees even though they have been reported to be way behind on their required payments.

    Perhaps a good question is where does the money come from that pays into VRS? I suspect it’s a combination of State, locality and employee.

    I know the State does not pay the pensions of teachers who are not SOQ-funded, i.e. teachers not mandated by the state and 100% funded by the localities including their health care and pension benefits.

    but he’s the more germane question – for ANY pension, public or private sector – or for that matter even Social Security – if enough money is coming in to pay for all existing retirees.. then what exactly does unfunded liability really mean? Does it mean, at some point in the future, without changes, that the amount of money from the fund and existing pension plant payments is not enough to pay out 100% of promised benefits?

    So for example, for VRS – what exactly is the unfunded liability? If it can pay out all benefits and there is more money coming in every year – enough to pay out 100% for new retirees.. then what exactly is “unfunded”?

  9. LarrytheG Avatar

    90% of Federal spending is for salaries – and more than half of that is for private sector salaries – i.e. contractors and companies supplying products and services to the govt – very much like you’d see in NoVa or Hampton where there are govt employees, contractors that work for the govt and companies that provide products and services – like ships and computer software, etc and ostensibly leveraging the benefit of private sector productivity to make Federal dollars go further rather than have govt employees do that work.

    The Point? When you cut taxes – you also cut these jobs … and they are real jobs – ask NoVa and Hampton if such cuts affect employment. Did the sequester adversely affect NoVa and Hampton economies?

    I’m not advocating that we not cut govt employees or govt spending.. on the contrary – either we have to cut that deficit spending or we have to increase taxes to pay for it or we’ll end up adding more and more to the deficit and debt.

    What I’m directly questioning is the claim that if you cut taxes that you generate increased private sector economic activity which then replaces the lost tax revenue.

    That’s an oft claimed idea/concept from folks who don’t make the claim as a way to chisel down the deficit. Nope.. they want to do it as a way to INCREASE govt spending – and if it fails – then increases the deficit instead.

    In other words – if it actually “worked” then CBO and other economists could say with precision – “IF we cut taxes by X amount, we will reliably get Y increased tax revenues.

    As said above – the folks who advocate doing this – NEVER advocate it as a way to cut the deficit . Nope.. “they” propose it – so they can SPEND MORE money and in the end are willing to risk – increasing the deficit – and the debt if they are wrong on the claimed benefits.

    Kansas tried this most recently and a simple Google search of ” kansas tax cut budget crisis” will tell you how it worked.. it did not.. it was a disaster and they are still trying to deal with it… and ultimately tax INCREASES were required to make up for the revenues lost from the earlier tax cuts.

    This is why it has been and is continued to be called Voodoo Economics… because it’s never proposed as a deficit reduction idea – that if it fails – the only harm is that it did not reduce the deficit as much as hoped.

    Instead, it is used as justification for spending MORE and if it does not work – the deficit actually INCREASES.

    That kind of economic policy is bogus and Kansas is most recent proof of it.

    So let’s do it but let’s target the deficit and if it does not pan out then we get less deficit reduction than hoped. But to use this technique as a justified for more spending – and if it fails to work, we add to the deficit…

    well.. that’s just bogus as all get out.. and coming from self-proclaimed fiscal conservatives who are nothing of the kind.

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