Are new state retirement requirements an unfunded mandate?

A planned fix for the state’s struggling public worker pension fund has local school and county leaders crying foul and warning of tax hikes as they brace for required raises meant to offset increased employee retirement contributions.

SB 497—passed quickly at the tail end of the 2012 legislative session and heralded as an effective reform by Governor Bob McDonnell—will require public employees covered by the Virginia Retirement System to contribute 5 percent more toward their pensions, while also requiring employers to up workers’ pay by 5 percent.

McDonnell claimed the new contributions will be a much-needed shot in the arm for the chronically underfunded system. “We are all in this together,” he said via press release at the start of the session in January, “and this is a basic matter of math.”

Bad math, according to Albemarle County Board of Supervisors Chair Ann Mallek.
“Only on the surface does it look like a wash—it is not,” she wrote this week in a letter to McDonnell blasting the bill.

County Executive Thomas Foley said the required pay increase could cost Albemarle and its schools up to $1.6 million—about a penny on the tax rate, he said. It’s a sum they would have to cover in one-time expenditures this year, he said, since the budget process is nearly complete. While Charlottesville employees aren’t in the VRS and thus aren’t affected, city schools will be on the hook for several hundred thousand dollars, said Ned Michie, chair of the Charlottesville School Board, which will have a significant impact on the budget in an already lean year.

But because Federal Insurance Contribution Act withholdings will also go up, Mallek said, employees will actually see a decrease in their total incomes. The result is that nobody’s happy, she said.

“There’s general outrage across all different political persuasions, even on this board,” she said. Her letter to the governor was part of a rising tide of bipartisan frustration over the mandate statewide, she said. “Everyone universally said ‘Knock it off.’”

City and county leaders said some of their frustration stems from their feeling that McDonnell and the legislature dug the hole, but are asking taxpayers and public workers to fill it.

“The governor chose to borrow money from the VRS a couple of years ago,” Mallek said—a $620 million deferment approved by the legislature to plug holes in the state budget. “Instead of paying it back, he called it a surplus. It’s completely irresponsible.”

Michie said it’s one more unfunded mandate that leaves local government holding the bag.

“It’s just another example of the state backing off its commitment to funding education,” he said. “It drops more in the laps of municipalities, and that’s tough on municipalities.”
Officials have asked the governor to amend the bill to let them to phase in the raises over five years—currently allowed for school employees, but not local government workers. They’re also asking for a year’s grace period, considering the changes are coming after many municipalities have already advertised their tax rate.

Foley said the objections go beyond counties, cities and schools bristling at the state meddling in how they compensate employees. They know the retirement system needs a fix, he said, but he and others think the governor and the legislature offered up a poor solution that sets a bad precedent.

“It’s not just local government crying and moaning and groaning,” Foley said. “This has a huge impact, and I don’t think they’ve really assessed the costs.”