Tuesday, January 17, 2012

Don't Let Them Use JLARC to Destroy VRS

There are a number of bills being considered by the General Assembly. I’d bet my last dollar that the proponents of these bill will all claim that the recent JLARC report, "Review of Retirement Benefits for State and Local Government Employees," recommended what they are doing in their bill. In fact, the Governor has already claimed that the report supports his VRS proposals. In fact, some of his proposals run counter to what the report recommended. The JLARC report explored a number of options, but it did not recommend shifting from a defined-benefit pension. Let's look at each bill, and then at some of what JLARC said.

But, first, let’s look at the brief summary from the JLARC report:

The defined benefit retirement plans administered by the Virginia Retirement System (VRS) are an important part of the total compensation provided to employees and have helped the State remain competitive as an employer, albeit marginally in 2011.

The retirement plans are effective at helping to maintain a stable and qualified public workforce. When paired with Social Security, the benefits provide employees with adequate income in retirement after a full career.

The asset to liability ratio of the plans has declined, which is due partly to the historical tendency for the State to pay less in payroll based contributions than is necessary to fully cover the costs of the plans. If the trend of paying lower than necessary contributions continues, the existing unfunded liabilities ($19.9 billion in FY 2011) will increase.

The General Assembly has options to modify the plans’ provisions to reduce future costs, although benefit reductions could diminish the State’s competitiveness. The General Assembly also has options to introduce an alternative plan for employees, and either a defined contribution or a combination plan would have advantages, depending on the State’s objectives. Neither is projected to produce substantial cost savings over the next ten years and could result in higher costs.

HB 257 (Stolle) – This bill enables local governments to establish their own defined-contribution plans for new hires. The new hires would not participate in the VRS. The local government or school board would determine the specifics of the plan.

What did JLARC say? The report said, “It appears that closing the defined benefit plans would not be advantageous for the State and local governments as employers from either a cost or a human resources perspective, or advantageous for most employees.”

“…retaining the defined benefit plan is a better workforce management strategy.”

SB 498 (John Watkins) creates an optional hybrid retirement program for state and local employees. The employee has 60 days to opt into this plan. If they do not opt in, they go into the existing DB plan. This bill offers a plan containing a defined benefit (DB) pension with a 1% multiplier and a defined contribution plan (DC). The employer contributes to the DB at the designated rate and 1.5% to the DC plus a match to employee contributions up to 2%. The employee would make a mandatory contribution of 4% to the DB and 3% to the DC. The employee could contribute up to an additional 2% to the DC in ½% increments (.5, 1, 1.5, 2).

Here is part of what the JLARC report said about this plan:

With the provisions that would be offered in this optional combination plan, employees at each income level used to measure income replacement could potentially exceed the income replacement targets if they could defer five percent of their salary to their retirement account in addition to the four percent required to the defined benefit portion, for a total of nine percent throughout their career. As discussed earlier in this chapter, however, a nine percent deferment level appears to be unlikely for most employees, given relatively low average salaries. Therefore, the maximum scenario is unlikely. However, even if employees deferred only five percent of their salary, which is the current rate at which State employees must contribute to the existing defined benefit plan, those with salaries at or below $60,000 at retirement could meet the target income replacements.
In the case of a retiree with 37 years of service, he or she will be guaranteed 37 percent of average final compensation at retirement through the defined benefit component, not including Social Security.

HB 1129 (Bill Howell and Chris Jones) – Makes several changes to the VRS benefit structure. Some of these changes affect current employees.

Under the provisions of this bill, the calculation of average final compensation changes to cover a period of 60 months rather than 36 months. Under current law, the use of a 60-month period applies only to those employees hired on or after July 1, 2010. However, current employees affected by this change in average final compensation may use the 36-month period of calculation for compensation received prior to January 1, 2013, if it is greater than the 60-month period of calculation.

In regard to this proposed change, the JLARC report said, “It is less likely that this option alone would significantly impair employees’ ability to retire at an appropriate time and with adequate income. However, this option may provide employees with some incentive to work longer in order to potentially increase the AFC on which their future benefit is calculated.”

In regard to the Cost of Living Adjustment (COLA), first, the bill delays the COLA for early retirees until they reach the age for unreduced retirement benefits.

The report says that, “In addition to cost savings, this option could result in retaining more experienced employees in the State and local workforce because it would create a disincentive for retiring early.”

Second, it reduces the COLA to the first two percent of inflation plus one-half of the next two percent, for a maximum total of three percent. Under current law, the COLA is the first three percent of inflation plus one-half of the next four percent, for a maximum total of five percent. Employees who are within five years of their unreduced retirement date at that time are grandfathered and not affected by this new cap on the COLA.

“PwC’s assessment of this COLA option in 2008 was that it would not have a substantially adverse impact on future retirees’ income or active employees’ ability to retire. In their analysis of this COLA option, Mercer found that it would not significantly impair the State’s competitiveness.”

"Ten years after retiring, this COLA would have resulted in a benefit approximately six percent below the current Plan 1 approach.”

Finally, for those hired on or after January 1, 2013, HB 1129 reduces the multiplier from 1.7 to 1.6.

The report said that, “For lower salaried employees whose income replacement needs are highest, their ability to retire with adequate income would be a concern under this option.”

Further, the report points out that, “Nationally, for states that participate in Social Security, the average benefit multiplier is 1.97 percent.”

"A slightly lower multiplier will be perceived by prospective employees as less generous than that provided by other states, and certainly less generous than that provided to existing employees. It is possible that this change could have a negative impact on the State’s recruitment goals. It would also result in a less competitive total compensation package for newly hired employees. Finally, employees hired under this provision could be paying contributions equal to those of employees receiving greater benefits.”

In general, the report points out that, “it appears that further modifications to the defined benefit plans could diminish the ability of some agencies to recruit qualified employees.”

We have a battle ahead in the 2012 session. Many will be trying to diminish our retirement benefits and the benefits of future education employees. I hope this posting arms you with information which will help you defend our pension benefits as you interact with your senator and delegate.