PRESS RELEASE: Office of Governor Bob McDonnell–– One of the most pressing challenges Virginia faces is how to fund the retirement system that our dedicated police officers, state employees and teachers will depend upon in the years ahead. They’ve served the commonwealth well. Unless we serve them well now by making tough choices and crucial reforms to the retirement system today, it may not be there for them tomorrow. This isn’t about politics; this is just a simple matter of math.
Virginia’s Joint Legislative Audit and Review Commission (JLARC) reported that from 2009 to 2011, the unfunded liabilities in the pension system increased 69 percent, from $11.8 billion to $19.9 billion.
As of January 2012, the Virginia Retirement System (VRS) is funded at a low rate of 70 percent for state employees and 66 percent for teachers. Without further action, the JLARC report said that in 2013 our funded status could reach an unacceptable level of 63 percent for state employees and 61 percent for teachers. This means we stand the very real risk of being unable to meet our future obligations.
The structural imbalance in the Virginia Retirement System has not been addressed for too many years. It’s time for action, now. This doesn’t just impact public employees.
All three major bond rating firms have stressed to us how important a strong retirement system is to a state’s credit rating. Virginia has a AAA rating, the highest possible. It allows us to finance major infrastructure projects at the best rates available, and it makes Virginia a magnet for new businesses looking for stability in their home state’s finances.
If we don’t fix our state retirement system we would not only fail hundreds of thousands of employees, we’d also potentially dramatically increase future borrowing costs for taxpayers — and undermine our well-earned reputation for fiscal soundness. That’s unacceptable.
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Virginia’s defined-benefit retirement plan has long been a very good one for our employees. Until last year, most existing state employees paid nothing toward their retirement. Recent studies indicated that only three states had no such employee contribution requirement.
When our employees were asked to contribute last year, for the first time, the contribution was offset with a corresponding pay raise. In recent years, most private-sector companies, and many other states, have moved to either a less costly defined-contribution plan, or have made employees contribute more in order to get their systems solvent. Virginia simply cannot afford to remain an outlier.
That is why I included in my proposed biennial budget the largest VRS employer contribution in history for state employees and teachers: more than $2.2 billion. I also have called for further VRS reforms that, combined with the measures already announced, will infuse more than $5.8 billion in savings or new monies into the system over the next 21 years.
Those reforms include several proposals outlined by a legislative commission, such as: adjusting the final compensation period, benefit multiplier and cost of living adjustment (COLA), and offering state employees an optional defined benefit/defined contribution hybrid plan not unlike that available to federal employees.
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I have also recommended that state employees contribute 6 percent of their salaries toward their retirement, up from the current 5 percent. Although this additional one percent contribution will require state employees to help shoulder the burden of getting VRS back on track, the entire amount remains their money and is simply held in trust for their future benefit.
I have both phased-in the additional 1 percent over two years and offset it with a 3 percent performance bonus in 2012. This is on top of a 3 percent bonus given in 2010.
A 6 percent employee contribution is a reasonable amount that is in line with our neighboring states. North Carolina requires a 6 percent employee contribution. Maryland requires 7 percent from its state workforce and is now asking localities to pick up one-half of the teacher retirement system payments.
As we take these steps at the state level, so too will localities have to do more for their employees. Teachers are local employees, and the responsibility and liability for the teacher retirement system falls clearly on localities, not the state.
While the state makes about 38 percent of teacher retirement system contributions, it is not required to do so. The state is providing this assistance to localities, but the retirement system for teachers won’t work unless localities also step up to the plate.
The rates have been set, the bills are now due. VRS sets rates for localities, and thus the state now stepping up and doing our duty is not an unfunded mandate on localities as some have erroneously claimed.
These changes to Virginia’s retirement system are reasonable, necessary reforms that proactively address potentially serious future shortfalls now, while there is still time to ensure long-term stability by making relatively small changes.
We must have the leadership to act today to ensure our state and local employees’ retirement accounts — and the good credit of the commonwealth — are there, in full, tomorrow.