VRS reports magnitude of increased contribution need and unfunded liabilities

July 17, 2013

VRS

By Erik Johnston

The Virginia Retirement System (VRS) provided an overall system status update to the Joint Legislative Audit and Review Commission (JLARC) on July 8.

The major items of note for localities were details regarding the overall size of additional funding needed to maintain Virginia’s pension reform commitments and the scale and impacts of shifting unfunded teacher pension liabilities to localities.

Virginia Retirement System Director Bob Schultze said that the General Assembly and next governor will need to come up with an additional $160 million a year or $320 million total for the next biennium that must be adopted in 2014. 

Schultze said that the credit rating agencies will be watching to make sure that Virginia lives up to its commitment in the current Appropriations Act to gradually increase to the full retirement contribution rates certified by the VRS Board of Trustees by 2018-2020.

The $320 million in increased contributions over two years will move the state from funding 70 percent of the certified contribution rate to 80 percent. Coming up with this large increase in VRS funding may crowd out other budget requests.

Most worrisome for counties were the details presented regarding unfunded teacher pension liabilities. Local governments and the state share responsibility for paying the cost of teacher pensions, but under GASB 68 localities will have to claim all unfunded liabilities for teacher retirement plans after June 15, 2014 if they continue to pass state contributions through to VRS. 

VRS reported that this unfunded liability stands at around $15.2 billion in Virginia, and it is estimated that this shift in liability to localities will cause around 2 percent of localities nationwide to be downgraded by bond rating agencies.

In order to avoid this liability shift, the state would only have to pay its share of teacher pension liabilities directly to VRS. This would demonstrate to credit rating agencies and localities that the state is committed to paying its fair share of unfunded teacher pension liabilities. It would also ease the financial burden on localities and better protect their bond ratings.

VRS also provided a breakdown to JLARC of the unfunded teacher pension liabilities for the state’s ten largest localities. VACo obtained from VRS the most recent projections of the unfunded teacher pension liability for all Virginia localities.

Click here to view your locality’s estimated portion of the $15.2 billion in unfunded teacher pension liabilities.

This number is likely to be more than double your FY12 total creditable compensation.

VACo advocated for the state to pick up its share of the unfunded teacher pension liability in this past year’s legislative session. The VRS reported numbers on the size of the unfunded liability and potential impacts strengthens VACo’s case that this liability shift must be fixed. 

VRS Director Schultze is scheduled to speak at the VACo Compensation and Retirement Steering Committee Meeting on August 16 during VACo’s Summer Meeting. He will provide an update on the unfunded liability issue and its impact on Virginia counties. 

An article from the July 9 edition of the Richmond Times Dispatch provides a summary with more background on pension reform in Virginia.

VRS’ performance reports provided some good news. VRS achieved returns of 11.8 percent in the most recent reporting period, increased the diversity and funding for their asset allocation since 2005 and approved a new Investment Policy Statement. The performance puts the retirement system just short of the $58.3 billion it was worth in 2007, before the recession sent investments plunging to a low of $42.6 billion two years later.

In other VRS news, the VRS Board of Trustees met on July 11 and approved a Revised Pension Funding Policy recommended by the Benefits and Actuarial Committee. The updated plan brings VRS into line with industry best practices by paying any new unfunded liabilities back over an amortized closed 20-year period. The current unfunded liability will be amortized over a closed 30-year period. The move from an open to a closed amortization period puts VRS on track to pay off unfunded liabilities rather than the previous policy, which basically refinanced unfunded liabilities every year without paying off the principal.

The impact of this policy change will not likely be felt for the next ten years as contribution rates remain nearly identical to their current trajectory. Rates will increase over the next decade due to pension reform, but not due to this policy shift. In the coming decades contribution rates will be higher under the new policy, but unfunded liabilities will decrease. VRS will announce next year’s contribution rates for state employees and teachers in October and for local government employees in November.

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