BY CHELYEN DAVIS
RICHMOND
--As lawmakers prepare to cut $4 billion from the next two-year budget without raising taxes, they're looking to borrow from state employees' retirement to cover part of it.Gov. Bob McDonnell, the House Appropriations committee and the Senate Finance committee have all proposed a plan under which the state will contribute less than its share toward the Virginia Retirement System for the 2010-12 biennium.
Doing so won't affect the money current retirees receive, and shouldn't affect individuals' retirement
But it does require the state to put in more money in future years to make up for the loss, and some legislators think it sets a troubling precedent for borrowing from the VRS system.
"It's bad fiscal policy," said Sen. Richard Stuart, R-Westmoreland, who said the proposal may force him to vote against the Senate's budget tomorrow. "We're failing to fund our obligations. We're basing our ability to repay it on assumptions that may or may not be correct."
The state and local governments make contributions to the VRS for the retirement for each state employee and for local employees such as teachers. Those contributions are based on two formulas.
One is the "normal" rate, which is what it would cost the state to pay the retirement for an employee if a list of actuarial assumptions are correct: if the employee's salary rises at the expected rate, if they retire at the normal time, if they live the expected number of years after retirement, and so on.
The other part of the contribution level is called the Unfunded Actuarial Accrued Liability (or UAAL for short). This is the amount the state must set aside, over the normal rate, to account for unforeseen changes that might happen since an employee started work. Those unforeseen changes could be higher-than-expected pay raises, legislative changes to benefit packages, or gains or losses in VRS investments.
What lawmakers are proposing is to pay only the "normal rate" part of the contribution (although the Senate's proposal is to pay the normal rate plus 20 percent of the UAAL). This would go on for two years, at which time the state would resume full payments, plus whatever is needed to make up for the two years of lower payments.
Doing this saves the state more than $500 million--which is about one-fourth of the $2 billion senators were looking for in the budget. Former Gov. Tim Kaine had already proposed the other $2 billion worth of cuts.
Local governments would also get a two-year break on their own VRS payments, saving them about $250 million a year, although they, too, would have to pay it back eventually.
The hope behind this plan is that the vast VRS fund--which still has almost $50 billion in assets--will see its investment rate of return rebound in the near future.
Lawmakers are also counting on another proposal requiring future state employees to contribute more toward their own retirement. Although it doesn't impact current employees, the expectation is that it would bring down VRS costs in the future.
While the governor and the majority of both houses' money committees think the VRS plan is a safe way to help shore up the budget, it still makes some lawmakers nervous.
"It's an easy fix to a short-term problem. It's unrealistic and it's very poor fiscal policy," Stuart said. "We have got to resist gimmicks like that to balance the budget. Times may get worse yet."
Del. Albert Pollard, D-Lancaster, said the proposal is "highly dubious." He said the state is already not fully funding its obligations to the VRS system.
Sen. Edd Houck, D-Spotsylvania, a senior member of the Senate Finance Committee, said deferring payments to the VRS system is something the legislature has done before, although not to this level.
He said the retirement system is "very sound" and can withstand two years of decreased contributions.
Besides, Houck said, senators see few other options to balance the budget, given that Republicans have rejected tax increases and cuts proposed to education, health services and public safety are already deep and painful.
"These are unprecedented times," Houck said. "We've cut and cut and cut and cut. It's a way to help minimize the cuts to core services."
Houck said it's not bad policy, although it's also not something he thinks the state should do routinely. Regular "borrowing" from the retirement fund could negatively impact the state's treasured triple-A bond rating.
That's Del. Mark Cole's worry.
"I'm a little concerned about the precedent it sets," said Cole, R-Spotsylvania. "I have reservations about it. I hope it does not become a precedent that we do in the future."
Sen. William Wampler, R-Bristol, a member of the Senate Finance committee, said he has concerns, too. He wanted a stand-alone bill, rather than having this action exist solely as part of the budget bill, and wants VRS to estimate the interest that will be due on the money.
"We'll be paying for this action over a long period of time," Wampler said. "It is not a good idea."
Chelyen Davis: 540/368-5028
Email: cdavis@freelancestar.com