Front and center

Virginia has a $17.6 billion gap between how much it will probably need to cover state worker pensions and how much the Virginia Retirement System should take in over the next several decades. That gap is called an "unfunded liability" and states and municipalities across the country are struggling with similar problems (often much worse than Virginia's).

It's a hugely volatile issue. Government workers, of course, fiercely resist cuts to their benefits, no matter how expensive they are. Pension reform led in part to Wisconsin Gov. Scott Walker's showdown with public sector workers last winter and has been a defining issue for New Jersey Gov. Chris Christie. In Ohio, unions just forced a referendum on a recent collective bargaining law that lets them negotiate salaries but not pensions. The issue will be front and center for our General Assembly during the next round of budget negotiations.

Gov. Bob McDonnell didn't make the problem any easier last year when he and legislators deferred $620 million in pension contributions so they could balance the two-year budget without tax increases or layoffs. Next year the state must start returning that money to the system, with interest. The governor and General Assembly also required, beginning July 1, employees to contribute 5 percent of their salaries to the pension fund, but offset that with a 5 percent raise. Basically, they punted.

It helps somewhat that VRS officials reported last month to the Joint Legislative Audit and Review Commission that the retirement system's investments have regained about three-quarters of the nearly $20 billion they lost in the market crash of 2008 and are now valued at $53.8 billion. Given recent talk of a "double-dip recession" and its effects on the stock market, however, who knows how long those gains will last? Even tiny changes in investment rates of return, inflation, and so on have massive long-term effects on the system. The economy and a host of other factors will determine how much Virginia taxpayers actually have to pay out and when; it could be far more (or less) than $17 billion.

What to do? Robert Carlson, a former member of the Virginia Retirement System Board of Trustees and current Chairman of the Fairfax County Employees' Retirement System Board of Trustees, explained the options in a helpful paper released yesterday by the Thomas Jefferson Institute for Public Policy. In the paper and conference call he explained that Virginia has a "defined benefits" plan, in which retirees are guaranteed payments, usually a generous percentage of salary, tied to years of service and other factors. By the time they pass away employees will usually receive far more than if they had just saved and invested the state's contribution. Such plans were established when there was less pressure on state governments and people's life expectancies were much shorter.

The other major type of pension plan is the "defined contributions" program, far more common today in the private sector. The worker and perhaps employer contribute a certain amount from each paycheck toward a 401(k) or IRA, and whatever the account is worth when he retires is how much he receives.

It sounds cheaper and easier to eliminate the defined benefits plan and replace it with a defined contribution plan. But this, according to Carlson, might eventually cost taxpayers more. As the plan winds down, with fewer and fewer people contributing, the pension fund will be depleted, leaving the state responsible for payments to tens of thousands of long-living retirees. Another problem is that it can create an "unhappy and disenchanted" public work force, he said. (Does anybody really want "disenchanted" state cops handing out speeding tickets? They're grouchy enough already.)

How about keeping a defined benefits program, just making it a little less beneficial? Legislators won't like this idea because few groups vote as reliably as state workers and old people; the idea of cutting pension benefits brings visions of grouchy, strike-prone and/or retired state workers flooding to the polls or even the streets-it's doubtful that Virginia legislators are ready to make Virginia the next Wisconsin. It may not even be legal to cut benefits to current employees; the courts are still working through this.

Another option, suggested Carlson, is to reduce benefits for new employees, and possibly adding a defined contribution option to create a hybrid plan. That keeps promises to current workers while saving taxpayers down the road. Unions won't like it because it makes their fields less attractive to new members, but in today's fiscal climate it's a hard case to make.

Carlson believes that legislators "see this as an important and timely issue. The question is whether they can agree on changes for this next session." If they don't, added Jefferson Institute president Michael Thompson, "we could get ourselves into a more difficult situation down the road."

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