Monday, March 12, 2012

Who took a hit in the Saturday Night Massacre?

What is the consequence of the Saturday Night Massacre – the rushed passage of the conference report of SB 498, SB 497 and HB 1130? The House and Senate passed a 21 page bill just minutes after receiving it and with no fiscal impact statement for the bill. The debate, especially in the Senate, confirms that they did not know what they were voting on. The bottom line is that Virginia’s state and local employees will pay the price for the General Assembly’s 20-year record of underfunding VRS.

I will try to offer a quick and dirty analysis of who takes a hit and who does not.

First, there are no changes for those who are already retired.

Second, all employees who have fewer than 20 years of experience and who retire before age 65 will see their annual Cost-of-Living-Adjustment (COLA) delayed until age 65.

Current VRS Plan 1 members who are not vested (those having less than 5 years of service credit as of January 1, 2013) and Plan 2 member (individuals hired after July 1, 2010) will see three changes which will reduce their ultimate retirement benefits:

1. Average Final Compensation (AFC) will be calculated based on the average of their highest 5 years rather than the current 3 years (Plan 2 already uses 5 years).

2. The COLA will be capped at 3% rather than the current 5% (8% in Plan 2).

3. The multiplier in the retirement formula will drop from 1.70% to 1.65%.

All employees hired after January 1, 2014 will have a mandatory hybrid pension system. This system will have a defined benefit (DB) component with a 1% multiplier and a defined contribution (DC) component. The employee must pay 4% of salary toward the DB and 1% toward the DC. The employer will match up to 3.5% of employee contributions.

The Joint Legislative and Audit Commission’s actuarial analysis indicates that a 60-year-old teacher making the average teacher salary will receive $9,129 less in annual benefit if they make the minimum required contribution and $874 less if they make the maximum contribution. In short, future teachers will pay more to get less.

Finally, the conference report requires the employee to make the 5% employee contribution, but the employer must give off-setting raises. This may be phased-in 1% per year.

This is a quick and dirty analysis. A much more detailed analysis will follow. The impact of the bill on disability benefits remains unclear. We are going to be doing what none of the legislators did before the vote – reading and analyzing the bill.

Kudos to Delegate Johnny Joannou! He refused to sign the conference report, saying that he did not know enough about the bill. Unlike the others, he knew enough to know what he did not know.