JLARC Presents Virginia Retirement Service (VRS) Oversight and Outlook Report Ahead of Employer Contribution Rate Deliberations

August 23, 2019

On July 15, VACo staff attended the meeting of the Joint Legislative Audit and Review Commission (JLARC) in which commission staff delivered their annual report on VRS oversight. JLARC is responsible for the ongoing oversight of VRS under the provisions of the Virginia Retirement System Oversight Act. JLARC provides a yearly report in July on the health and status of VRS, which administers retirement plans and other benefit programs for state and local government employees. VRS staff also gave presentations to the Commission.

According to JLARC, the funded status of VRS plans has increased by 10 percent in the last five years due to sustained market investment returns and fully funded state and local employer contributions to the plans. However, VRS’s December 2018 stress test and sensitivity analysis concluded that existing unfunded liabilities expose VRS plans to increased risk in the event of a market downturn. Unfunded liabilities are the future obligations owed to VRS beneficiaries and the fund’s ability to cover them and amount to approximately $20 billion. As investment income currently accounts for about two-thirds of the money used to pay VRS plan obligations, the decrease over the past year in global economic growth, increase in trade tensions, and cuts to the Federal Reserve’s interest rates are potential causes for concern.

In October, the VRS plan actuary will present the State and Teacher plan actuarial reports to the VRS Board and recommend to the VRS Board contribution rates to support the plans. In November, the VRS Board will receive a report from the plan actuary that will provide information on all political subdivision plans in aggregate. Each local government will receive its custom actuarial report after the first of the year, which will include its contribution rates for the next biennium.

Due to recent market instability, the VRS annual rate of return may fall below the anticipated 7 percent, which may necessitate a lowering of the assumed annual rate of return going forward and lead to higher employer contribution rates. This would have a direct impact on state and local government budgets. Though Virginia code mandates the determination of employer contribution rates in “a manner so as to remain relatively level,” VRS estimated that lowering the assumed rate of return by 0.25 percent could have a fiscal impact of more than $200 million.

Lowering the assumed rate of return to reflect the realities of a changing market would likely be beneficial to the long-term fiscal health of VRS, even if it is painful to the budgeting process. However, additional state cash infusions to VRS may help offset any lower rate of return and maintain the funded status of the pension plans that VRS administers, contributing to the long-term fiscal stability of state and local government. This was done in recent years when the General Assembly made large one-time appropriations to pay down the 2010-2012 deferred contributions for State and Teacher plans.

Relatively speaking, the health of Virginia’s pension system remains close to the national average according to data from the Pew Charitable Trusts, which ranked Virginia’s funded pension ratio as 20th in the nation based on the most recent FY 2017 data. The report demonstrates the range of health between different state pension systems and their direct impact on state and local fiscal policy. For instance, employer contribution rates in the three states with the best-funded systems averaged only 8 percent of payroll, while rates in the three worst-funded systems averaged 30 percent of payroll for covered employees.

In addition to the Oversight Report, the Commission also heard presentations from VRS senior staff, particularly on the Hybrid Retirement Plan. Implemented in 2014, the Hybrid Plan combines a defined benefit plan and defined contribution plan and features a mix of mandatory and voluntary employee contributions. According to VRS, studies show that employers play an integral role with employees to make the decision regarding voluntary contributions to their plan.

VRS has prepared a variety of resources for employers to use to support their orientation programs and counseling sessions with their employees, including:

An employer toolkit provides tools for employers to communicate about the plan, including special communications for voluntary contributions and auto escalation, which is coming January 2020.

SmartStep allows members to set increases to their voluntary contributions annually at a date they choose. They don’t have to wait for auto-escalation.

The hybrid paycheck calculator allows members to see the impact on their paychecks and the tax benefits when they increase their voluntary contributions.

VRS has developed the Hybrid Retirement Plan Learning Channel, a new showcase featuring several short videos that lay out key aspects of the plan at different stages during members’ careers, which employers can use during orientation sessions or send to members to view.

As the hybrid plan population changes with new hires and those exiting employment, about 48 percent of these employees are making a voluntary contribution. However, VRS anticipates this number to increase. The Hybrid Retirement Plan was designed with an auto-escalation feature to encourage employees to save. Every three years, employees’ voluntary contributions to their Hybrid 457 Deferred Compensation Plan accounts will automatically increase by 0.5 percent (payroll deduction) until reaching the maximum 4 percent. The next automatic escalation takes place January 1, 2020.

VRS serves 722,187 total members, retirees, and beneficiaries. The fiduciary net position of the trust fund is $80.4 billion and as based on assets, is the 19th largest among public and private pension systems in the United States. 86 percent of VRS retirees remain in Virginia. The funded status of the State, Teacher, and Political Subdivisions plans was 76.8 percent, 75.1 percent, and 89.9 percent respectively.

The full JLARC report and VRS presentation can be found here and here respectively. The VRS Board of Trustees will meet next on October 10 at 1:30 p.m. in Richmond. VACo staff will continue to report and engage on these issues.

VACo Contact:  Jeremy R. Bennett

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