A MANDATED “stress test” of Virginia’s state employee pension fund has revealed some very unsettling news. The Virginia Retirement System is even more vulnerable than it was before the Great Recession if the current 10-year bull market crashes, or even if there’s a significant correction that results in lower-than-expected returns.

“In 2008-2009, financial markets crashed around the world resulting in the worst annual investment performance on record for VRS,” according to the state report. “Since that time, even with the pension reforms and more diligent funding of the statewide plans by the governor and General Assembly, the system remains at risk if another investment return shock were to occur.”

It’s been more than 10 years since the last market low on March 6, 2009. Since then, the Dow Jones and Standard and Poor 500 averages are up more than 300 percent. But what goes up eventually comes down, and if this historically long bull market is on its last legs, the VRS is in trouble.



During the Great Recession, the VRS lost nearly a quarter of its value. But now the pension fund will be even less able to weather another large financial storm. “If we were to go through what we did in ’08 and ’09, we’re screwed,” Virginia Finance Secretary Aubrey Layne told the Associated Press. “We’re screwed. I don’t know what else to say.”

Last year, Virginia’s pension fund paid $4.8 billion to retired teachers, police officers and other state employees. After earning a 7.5 percent rate of return for fiscal 2018, VRS is now 76.8 percent funded, according to its 2018 Comprehensive Annual Financial Report. In 2000, VRS was in the black with $35.4 billion in assets and $34.2 billion in liabilities. Now it’s underwater.

In 2016, the Pew Charitable Trusts ranked VRS 20th—in the top 40 percent of state pension funds. It is not nearly as bad as last-ranked New Jersey’s pension system, which has just 31 percent of the assets needed to pay its obligations. But neither is it like Wisconsin’s pension system, which has 99 percent of the money it needs to pay its state employee retirement benefits already socked away.

The VRS stress test noted that “if a repeat of the five-year returns observed by the plan from fiscal year 2008–2012 were to occur beginning in fiscal year 2020, the State plan would be in a worse position to absorb the impacts of the investment losses than it was in 2009. The State plan would see an increase in unfunded liability of approximately $6.9 billion, peaking at $12.5 billion in 2026.”

This “shock scenario” would force local governments, which actually pay more into the system than the state, to increase their required pension contributions to “over 22 percent of covered payroll within a few years of a market crash.” Counties, cities and towns would suddenly have to come up with hundreds of millions of dollars to cover their VRS contributions during a severe economic downturn because state law requires them to make full actuarial payments, even in years when the state is not doing the same.

“Because the statewide plans have not paid down the legacy unfunded liabilities, an additional investment loss of the extent seen in fiscal years 2008 and 2009 would potentially put the state plan’s funded status below 55 percent,” according to an analysis by Chief Investment Officer. Virginia taxpayers already have to pay $9.1 billion in interest over the next 25 years on the outstanding $7.4 billion legacy balance.

Even if there’s no major stock market crash, a decade of sustained lower-than-expected returns would be enough to reduce Virginia’s pension fund assets by up to 15 percent. VRE’s total unfunded liabilities were more than $20 billion as of June 2017. A 15 percent loss in value would put VRS in deep trouble, as Layne correctly pointed out.

Nobody wants to think about the next recession when the state and national economy are booming, but that attitude is exactly what got VRS into trouble the last time. The results of the latest stress test should not be ignored. As University of Virginia Associate Economics Professor Leora Friedberg warned public employees last year, they “need to be aware that the benefits they’ve been expecting may not be there.”

Voters—especially teachers, police officers and other state employees who are depending on VRS—should ask every candidate running for the General Assembly this year exactly what they plan to do about it.

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