Following up on Jim’s recent post about the WMATA pension problems, I decided to check on the recent performance of the Virginia Retirement System.  Now that I get a monthly check from these folks, my interest is more active than in the past.

Analysis of pension plans is out of my league, but there is a recent report that does create some concern and even I understand it.  VRS is required by statute to conduct periodic stress tests.  The latest one was released in December.  For those who are interested in digging into the weeds, here it is .  Toward the end of the report, the authors point out that VRS lost about 25% of its value in the first couple of years of the Great Recession.  They warn that, if there is another great shock or even a period of a few years of returns lower than needed, the plan would be in a worse position to absorb the shock than it was in 2009.  The Free Lance-Star had a good summary of the issue in this editorial.

In summary, to keep VRS able to meet its pension obligations, the General Assembly needs to continue its recent practice of paying down the plan’s unfunded obligations.

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18 responses to “VRS Not Out of Woods Yet”

  1. LarrytheG Avatar

    Thanks for writing – an interesting subject that bugs me for a couple of reasons.

    First – We never seem to characterize the specific consequences of unfunded liabilities. What happens if you don’t deal with it – specifically per the percentage of unfunded liability? Does it mean that if VRS doesn’t “do something” in the next 20 years that bad stuff will happen? Or the next 10 or 5 years? And what actually happens?

    We KNOW what happens with Social Security. We know the timeframe and we know what happens if it is not fixed – folks get reduced amount of pensions BUT it will never drop below 75%

    So what are the numbers for VRS? When will pensions be reduced if we do nothing?

    The second thing is that this is not a government competency issue. The same exact thing happens to folks with private pensions; i.e. if the economy goes south – so does their nest eggs and during the last recession, many had to continue working past their planned retirement.

    Some did not have enough to start with. Many folks – a good number – retire with ONLY social security – that’s their only retirement income. ( 21% of married couples and 43% of single seniors rely on Social Security for 90% or more of their income)

    If the Govt had not mandated they pay FICA taxes – many would literally be on the streets with no Medicare, just Medicaid.

    Just talking about the “serious problem” of “unfunded liabilities” really does not educate folks as to the real nature of the issue and worse than that, it provides an opportunity for the gloom and doom folks to gin up all sorts of worst-case scenarios… AND essentially blaming it on bad governance.

    Just to be clear, more than 5000 private company pensions had to be taken over by the govt agency – Pension Benefit Guaranty Corporation which has not spent one dime of taxpayer money. They get their funding from insurance fees on companies that provide pensions AND often the taken-over pensions – pay out pennies on the dollar.

    So when we look at this problem on a wider scope – we see that the “unfunded” issue affects just about all of us – the main difference being the particular way we get our own pension.

    And the FEES brokers charge for managing folks investments are just outrageous… that’s a real scandal…

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      First of all, as I stated in my post, whenever discussion of pensions and funding issues came up in the past, my eyes would glaze over. There are probably other folks who follow this blog who can answer your questions better than I can, but here goes.

      One, I am not sure what happens if the state does not deal with its unfunded obligation. Upon perusing the Code, I did not find any reference to a decrease in benefits resulting from insufficient funds in the program. Although governmental pension funds are sounder and more reliable than private ones, there has been at least one instance in which a municipality (in another state) defaulted on its pension obligations. If the Virginia program ever reaches the point that the assets of VRS are insufficient to provide the pension payments required by law, the General Assembly will need to make some hard decisions. By that time, all political hell would have broken loose.

      The state program is currently about 76 percent funded, which means that any potential default is relatively far into the future. Probably the most immediate issue would be any effect on the perception of Virginia’s overall fiscal condition. A state’s future pension obligations and its ability to meet those obligations is one of the factors used by bond rating agencies in their financial assessments. No Governor or General Assembly wants to be the one presiding over a loss of Virginia’s coveted AAA bond rating.

      Two, you are right about the issue not being about the competency of the VRS. The agency has a good track record of returns on its investments. The smaller returns in recent years are reflective of overall market conditions. Nevertheless, the current level of underfunding is a reflection of political expediency on the part of the General Assembly. Several years in the past, the legislature substituted the VRS’s projected rate of return with its own, higher, estimate. That maneuver resulted in a lower appropriation of state funds as the employer (state) share of funding for the program. Of course, once you get behind in funding for the program, it will take larger appropriations in the future to catch up. More recent sessions of the legislature have been gradually catching up.

      1. Reed Fawell 3rd Avatar
        Reed Fawell 3rd

        “One, I am not sure what happens if the state does not deal with its unfunded obligation.”

        Dick – Nor am I sure what might happen. But I know what should happen – ANOTHER BACON’S REBELLION!

        This remedy is long overdue. I am sure The Great Sphinx Thomas Jefferson would wholeheartedly agree.

        Long live Nathanial Bacon! Now dead at 29, at the height of his power, undefeated, unblemished, and unbowed.

  2. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    “Toward the end of the report, the authors point out that VRS lost about 25% of its value in the first couple of years of the Great Recession. They warn that, if there is another great shock or even a period of a few years of returns lower than needed, the plan would be in a worse position to absorb the shock than it was in 2009.”

    This is a big deal for all post Baby Boomer Generations, so for all Americans’ future. I will have a bit more on this fact tomorrow.

    Meanwhile, at least Tiger is out of the Woods! What a great Masters, thanks to Tiger Woods. Hope he’d got many more.

  3. LarrytheG Avatar

    I still think that in order for any such “warnings” about unfunded liabilities that – for the average person and not the actuaries it needs to be in a practical context that ordinary folks can relate to.

    here’s an example:

    and the REAL crux of the issue both Social Security and VRS and other pension funds is WHO increases contributions – the workers themselves or taxpayers.

    In VRS case – the investment managers can’t fix it – the GA must.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Several years ago, the General Assembly did take some actions to “fix” the system–at the expense of state employees. The traditional state pension plan is a defined benefit system. In such a system, the employee is guaranteed a fixed benefit based on defined factors. In the case of Virginia, the benefit is primarily based on the employee’s number of years of service and average compensation at the time of retirement. The employee may or may not be required to contribute to his retirement plan. Currently, state employees contribute five percent of their semi-monthly pay check.

      Several years ago, then-Speaker of the House, William Howell of Stafford County, pushed to convert VRS to a defined contribution system, in which benefits would not be defined by law, but by returns on investments. The resulting compromise was a hybrid system in which part of an employee’s contribution was used for a defined benefit and the remaining portion was placed in a 401-type account, which the employee could “manage”. The result was to limit the state’s future obligations and place more of the burden on employees. The Speaker persisted in later years to convert the whole system away from defined benefit, but he retired before he could accomplish that and most of the momentum behind that push seems to have faded. Because the changes were applicable only to employees hired after the effective date of the legislation and people like me were grandfathered into the old system if we wanted to stay, I have not paid too much attention to the details of the hybrid plan.

      1. LarrytheG Avatar

        The issue between defined benefit and defined contribution is significant.

        Basically, a system that was entirely defined contribution would shift the risk to the worker and away from a VRS type agency. If it were totally voluntary, unlike the FICA tax, a lot of folks would not contribute near as much, especially if there was no state match.

        The Feds in 1984 went to a 3-tiered system where the defined benefit is one leg and not near as big as it used to be when it was the stand-alone defined contribution pension prior to 1984.

        The second leg was Social Security.

        And the third leg is known as FERS – Federal Employees Retirement System and it’s a major success story – because the govt will match dollar-for-dollar up to a certain amount AND the employees have a wide choice of investments to choose from – ranging from aggressive and risky to safe but less earnings. They also have what the call “lifestyle” funds that essentially automatically adjust the investments as one gets older and closer to retirement.

        I don’t agree with what Howell was doing and I more agree with the way the FEDs do it with FERS.

        Further – I think that ALL govt employees – State and Local should be able to participate and that – their fund is totally portable not only for state and local agencies but with regard to moving to the private sector also.

        But basically, what Howell was advocating was to put ALL of the risk on the individual worker – many of whom are NOT well informed or educated with regard to investment and risk so I think his idea was not good unless he was also proposing a state version of the TSP program.

        But I DO think that individuals SHOULD shoulder some of the risk also AND be provided with the tools and ability to participate in their own pension planning and funding.

        We DO very much need to move away from the idea that it is the employer who is “responsible” and all you have to do is find a job with “benefits” and let the employer take the risk. That does not work in the 21st-century economy.

        Oh, and for those who think the Feds and State are incompetent and screw up things – the FERS is a classic lesson in good policy. It’s a game-changer for the government and it’s employees. Lots and lots of Fed govt workers have used FERS to build themselves significant retirement income by contribution a good amount of their pay – FERS encourages them to do that!

        1. Dick Hall-Sizemore Avatar
          Dick Hall-Sizemore

          The state has a modified version of FERS. It is a deferred compensation program. It is entirely voluntary and the amount that can be deposited, pre-tax, is governed by federal tax regulations. The state will match dollar for dollar, up to $20 per paycheck. The state contribution is minimal, but it is something. Employees have a variety of ways they can manage the funds. I put mine in a S&P 500 indexed fund and forgot about it.

  4. Steve Haner Avatar
    Steve Haner

    Probably time to update the information on how many (or few) of the employees now needing to help fund their own 401K are still not doing it, and leaving match dollars on the table…

  5. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    “Probably time to update the information on how many (or few) of the employees now needing to help fund their own 401K are still not doing it, and leaving match dollars on the table…

    Likely answer: a hell of lot “are still not doing it.”


    They got way too much rent and government taxes, fees, charges, tolls, regulation cost, and student debt to pay off monthly (whether for their account or that of their children, or grand children) to make any meaningful 401k contributions. Plus, what wealth they did have before was wiped out, plundered, by the government’s subprime mortgage debacle that blew up the American economy.

    The real question is: Will they and we ever recover?

    Is the age of home ownership now over, putting America’s landlords and credit card companies in charge of the future of most Americans? Yes, most likely, most American’s will live in a feudal age, a long dark age of indentured servitude.

    For absent great change, any real and meaningful financial recovery is highly doubtful for the great majority of those of us born after 1980. Those newly poor supplicants will become America’s Lost Generation of our age. Consider those Millennials and post Millennials today’s iteration of the Lost Colony.

  6. LarrytheG Avatar

    I think it is the personal responsibility of individuals to deal with the financial issues and NOT live beyond their means – a quaint phrase to some but the reality.

    If you plan on retiring when you get older – don’t be blaming govt and others for your own lack of responsibility and then claim the govt owes you “benefits” because they were part of the things that caused you to not take personal responsibility for your own needs.

    Those at the lower end of the economic scale have far bigger hills to climb and Social Security – a govt-mandated insurance annuity is there for them but for those who earn more – and have more expenses – that’s not excuse to not make hard choices in your own life as to what you CAN afford and what you CANNOT!

  7. djrippert Avatar

    My theory …

    I blame Obama, Trump and the people managing the VRS portfolio. Quantitative easing was supposed to be a short term, one time action by the Fed. However, Obama realized that near zero interest rates (financed by national debt) would enhance economic growth and burnish his presidential legacy. So, he continued printing money long after the worst of the 2008 recession had passed. Trump sees the same thing. Both made Fed appointments and keep pressure on the Fed to hold interest rates artificially low. The money managers for VRS undoubtedly use some form of “efficient frontier” model to allocate funds between equity and debt. My sense is that they assume historical return numbers for debt. They haven’t realized that our horrific political class is more than willing to play chicken with the US economy by printing money to keep interest rates low. Some day there will be Boomergeddon but they hope that someday will happen on the successor’s watch.

    Meanwhile, our political class in Richmond is too busy swilling martinis and chewing through surf and turf with lobbyists at Bookbinders to care.

  8. TooManyTaxes Avatar

    There seems to be more movement to hybrid plans, part defined benefit and part defined contribution. That’s what both FERS and the new VRS plan are. (VRS for new employees after date X).

    Hopefully, higher economic growth and a plan to fund unfunded liabilities over many years will get VRS on stronger footing. But, just like with private pension plans, there remains a risk of bankruptcy that would certainly cut benefits for both existing and future retirees. No one wants that result; ergo, there needs to be restricting of pensions going forward to reflect the longer lives of many retirees and a generally slower growing economy.

    So even the crazy leftists should come to realize that economic growth is good for everyone or at least everyone willing to work for a living.

  9. LarrytheG Avatar

    Actually I think Conservatives are just as bad as the liberals – just in a different way.

    They advocate for tax cuts on the idiocy that it will generate more tax revenue and that does not work. And if you do tax cuts without spending cuts -you add to the deficit and debt – like we are doing right now.

    But even in this context – as individuals – we are all still responsible for making choices about what we can “afford” right now and what we are putting aside for our retirement and blaming others, blaming the govt for our own less than responsible actions to fail to prepare for our own retirement .. that’s LAME!

    And it’s the problem we have; too many of us fail to be responsible for ourselves and we blame it on govt? geeze

  10. I am under that pay 5% plan by just a month. Biggest bunch of garbage. I will be working until my mid 70’s at least.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      But, when you do retire, you will know how much you will get each month. The amount will not be affected by the volatility of the stock market while you were working or while you are retired.

    2. LarrytheG Avatar

      I guess I don’t understand the complaint. As Dick says – you DO want some certainty in your retirement and the State does too – and that’s why they are taking steps to ensure that VRS will be solvent and you will get your retirement. Would you prefer that they don’t act?

      In the end – it’s your responsibility to do what has to be done for you to have enough money to live on. If we are to blame the govt – what would we blame them for and in the end – that still does not absolve us of our own responsibilities to do what we need to do – no matter the state of the economy of who we might blame …..

      This part, I do not get. Why is it the responsibility of Govt to “help” with our retirement in the first place – folks were “promised” a pension – not how much we’d have to pay into it.

      When the Feds went to FERS – there were complaints that folks were being “forced” to pay more into their retirements but the reality was that if they did not – they’d receive lower pensions. It’s the very same proposition if you were doing your own independent IRA and the economy did poorly – you’d have to put more into it and/or work longer.

      There is no “fault” or blame here unless one just wants to blame govt for all the ills of society which is akin to saying we’d do better without govt – which at least some of us will admit is a foolish concept – we all know how much “better” things are when there is no government – lots of places around the world with that circumstance…. you live in one of those countries and a “pension” is not something the govt has anything at all to do with – 3rd world they call it.

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