Wednesday, January 19, 2011

It’s time for some sober reflection on the VRS issues: The sky is not falling.

Virginia is confronted with an unfunded liability in the various Virginia Retirement System (VRS) funds of $17.6 billion. The General Assembly has failed to adequately fund the VRS. They have provided sufficient funds to meet the VRS Board of Trustee’s certified contribution rate only four times in the last twenty years for the teacher fund and six times in the last twenty years for the state employee fund.

It has taken us a decade to dig the hole we are in. As recently as 2001, the teacher fund, for example, was actually over-funded (106%).

The VRS plan for teachers is relatively conservative in its benefit structure. In terms of replacement income, we rank 37th among the states.

We strongly support efforts to make the VRS fiscally sound, but we do not feel that taking money from under-paid teachers, ESP, and from our school divisions is the best way to address this problem.

It is important to recognize that the sky is not falling. The market value of the VRS fund now exceeds $50 billion. Current retirees need not live in fear of losing their benefits.

The Governor suggests that we address this problem by making employees pay the 5% employee contribution to VRS, by giving future hires a choice of participating in VRS as we know it or in a defined-contribution plan, and by increasing the employer contribution rate for school board employees by 2% in the year ahead.

This plan breaks a promise made to state workers and school board employees who were told in the 1980s that the 5% employee contribution would be paid on their behalf in lieu of a raise. We were told that this was an irrevocable decision.

This action was taken by the state and local school boards because it was less expensive for the employer to pick up the 5% contribution than to provide a 5% salary increase, since the increased costs of certain fringe benefits would not have to be provided (FICA and VRS). Employees saw a 5% increase in take home pay, but it cost the employer less than 5%.

The Governor’s plan for a one time infusion of $311 million, a third or which comes from local revenue, will do little to address a $17.6-billion problem.

The actuarial horizon of the unfunded liability is, according the VRS, 80 to 90 years. We don’t have to repair the damage of underfunding and the Great Recession in a day. The best course of action is to follow the ten year repayment schedule for last year’s underfunding which was adopted in the biennial budget and to honor the rate certified by the VRS Board of Trustees in all future years. That is a reasonable approach to fill the hole, and an approach that does not impose an unfair hardship on VRS members.

Virginia, the 7th wealthiest state in the nation, currently pays her teachers a salary $5,400 below the national average. When we compare the average pay of teachers to the average pay of all workers in each state, only South Dakota teachers fare worse than Virginia’s teachers.

Most Virginia’s teachers have earned the same pay for the last three years, and many of them have seen salary reductions from cuts and furloughs.

This is no time to cut the salaries of Virginia’s teachers by re-imposing the 5% employee VRS employee contribution.

The Commonwealth is also considering the bifurcation of the teacher retirement plan by offering a defined-contribution option to future hires.

“The process by which the level of salaries and benefits is considered should be based on an established set of principles and goals.” - JLARC Review of State Employee Compensation, Oct. 2008

In the case of instructional staff in our public schools, the primary goal should be to attract and retain highly skilled teachers. Research indicates that, “Skilled teachers are the most critical of all schooling inputs.” – Dr. Ronald Ferguson, Harvard University

“Studies at the state, district, school, and individual level have found that teachers’ academic background, preparation for teaching, and certification status, as well as their experience, significantly affect their students’ achievement.” - Linda Darling-Hammond, Stanford University

While providing a defined-contribution option to school employees may in the long-term reduce the cost of providing a retirement benefit to employees, and it might even be attractive to prospective teachers who have no long-term commitment to the teaching profession, such a course is contrary to what should be the state’s goal of retaining experienced teachers in Virginia’s classrooms. The required service of 30 years to achieve full retirement benefits is a significant factor in retaining experienced teachers.

JLARC found that, “The defined benefit retirement plans the State provides are competitive
with what other employers offer and achieve their goals of retaining longer-tenured employees and providing an adequate benefit to retire.” – JLARC Review of State Employee Compensation, Oct. 2008

The adequacy of the retirement benefit generated by a defined-contribution plan to meet the needs of dedicated school board employees in their final years is questionable. PwC, in the 2008 JLARC study of Total Compensation for State Employees, found that “after 30 years of service, the defined contribution plan would have approximately 52 percent of the value of the current defined benefit plan. With Social Security, the defined contribution plan would also provide an income replacement of approximately 29 percent less than the current defined benefit plan.”

A Bedford County teacher, for example, who retires after 30 years experience in the current VRS pension will receive an annual benefit of $26, 223 (30 x 01.7% x $51,417). Using the PwC analysis, she would receive an annual benefit of $13,636 had she been in the defined-contribution plan.

A young person fresh out of college is not in the best position to make a decision of this consequence to her long-term well-being.

The defined-contribution option is not the best policy for the Commonwealth if our goal is to attract and retain high-quality personnel in our schools, and it is certainly not the best option for teachers and other school board employees.

As we work with the General Assembly in the days ahead, our shared goal should be to ensure the financial viability of VRS and to treat employees in an equitable manner that does not show them the door.