McDonnell announces VRS plan

Gov. Bob McDonnell announced on Thursday the second half of his 2012 legislative reform initiatives to address the long-term unfunded liabilities in the Virginia Retirement System.

If adopted by the General Assembly, Gov. McDonnell’s recommended actions would inject over $5.8 billion in new money or savings into VRS in the next 21 years. The governor has made solving the lack of adequate funding to cover the retirement for state employees, law enforcement officers, teachers and other public servants a top priority of his administration.

This year’s proposed reforms includes changing the formula for cost of living adjustments, phasing in an increase for employee contributions (not including teachers, judges and local employees) from the current 5 percent (established in the 2011 General Assembly and paired with a 5 percent pay raise for all state employees to offset the contribution) to 6 percent over the next two years, and creating a new optional hybrid plan that would give employees a choice to move toward a defined contribution system as opposed to the current defined benefits program.

The impact of the additional employee contribution of 1 percent phased in over the next two fiscal years will be more than offset in Fiscal Year 13 by the current proposed performance bonus of up to 3 percent. Employees were also given a 3 percent performance bonus in December 2010 at Governor McDonnell’s request, providing nearly $80 million in new compensation.

According to a review released Dec. 12 by the Joint Legislative Audit and Review Commission, from 2009 to 2011, the gap between the VRS liabilities and assets on hand to pay such liabilities increased 69 percent from $11.8 billion to $19.9 billion. As of the June valuation, the funding status of the system was 70 percent for state employees and 66 percent for teachers. According to JLARC, the plans could reach lows of 63 percent and 61 percent, respectively, in 2013.

Building on the important reforms to the Virginia Retirement System (VRS) which passed the General Assembly during the 2010 and 2011 sessions, McDonnell also announced earlier this month that his proposed biennial budget will recommend a total of $2.21 billion in employer contributions ($2.4 billion including law enforcement)– the largest employer contribution to VRS in history. The recommended employer contribution for state employees alone for FY2013/2014 is a record $596.9 million.

“For too long, Virginia has not properly funded the retirement system that our dedicated teachers, public safety professionals and state employees are depending upon for their financial security in the years ahead. The fact is, if we don’t have the courage to act today, their retirements are in jeopardy tomorrow” McDonnell said. “We have kicked this can down the road again and again, but I am determined to make the difficult decisions that will ensure the long-term solvency of our retirement system. As governor, I must be able to look state employees in the eye and promise them that their retirement benefits will be available when they choose to retire. Today I can’t do that. By enacting these reforms, we will be able to move closer to guaranteeing that security for VRS contributors.”

“We owe it to the dedicated employees of the Commonwealth to take action now to ensure their retirement is intact,” said Speaker of the House of Delegates Bill Howell. “Combined with making a substantial financial commitment to VRS in our state budget, this legislation will help ensure the long-term viability of our state retirement system.  This package presents a balanced approach that honors the commitment to state employees and teachers while taking the tough but necessary steps to protect their retirement.”

“Recognizing that further steps are needed to ensure that VRS remains solvent for its members, today’s proposal adopts JLARC’s recommendations to increase the programs financial integrity,” said Delegate Chris Jones. “While I know it is difficult in these tough economic times to ask VRS participants to increase their contribution, it is vital, in my opinion, that we develop long-term solutions that ensure the retirement of our hard working and dedicated public servants.”

The 2012 pension reform initiatives will be contained in two bills sent to the General Assembly. Once all the provisions of both bills are fully phased in, VRS would average between $160 to $170 million annually in cost savings and additional contributions. Over the next 21 years, VRS would gain $3.6 billion in contributions or cost savings, all of which could go toward reducing unfunded liabilities of the plan and insuring its future sustainability. This would be combined with the $2.2 billion employer contribution to make a total of $5.8 billion in additional money or savings being injected into VRS.

The pension reform draft legislation will be introduced as two bills described as follows:

Combined Defined Benefit Plan Reform Bill

Reduced Multiplier for New Hires Except Judges and Public Safety Employees (Effective Jan. 1, 2013)

·         Reduce the benefit multiplier from 1.7 to 1.6 for general state and local employees and teachers, hired on or after Jan. 1, 2013 who have no prior service credit in the VRS (new hires). The multiplier would not change for members of SPORS, VaLORS, JRS, or local LEOS members, or for general state and local employees and teachers hired before Jan. 1, 2013.

Cap COLA Formula at 3 Percent for All Current and Deferred Members (All Plans Including Judges) (Effective Jan. 1, 2013)

·         Reduce COLA benefit to a maximum of 3 percent (new hires, current employees and deferred members). The revised COLA formula would match the consumer price index for the first 2 percentage points of increase, and then match the next two percentage points at the rate of one-half to one, after which the COLA would be capped at 3.0 percent.

·         Members who are within 5 years of their unreduced retirement date as of Jan. 1, 2013 would be grandfathered.

Defer COLA Benefit Until Employees Reach Age for Unreduced Retirement Benefits (All Plans, Including Judges) (Effective Jan. 1, 2013)

·         Limit COLA benefit to employees who have reached the age for an unreduced retirement benefit (new hires, current employees and deferred members).

·         Members who are within 5 years of their unreduced retirement date, as of the effective date of this provision, would be grandfathered.

Average Final Compensation Calculated Over Highest Consecutive 60 Months (All Plans, Including Judges) (Effective Jan. 1, 2013)

·         Calculate average final compensation (AFC) over a period of 60 months rather than 36 months for Plan 1 employees (Plan 2 employees are already subject to a 60-month AFC). A “frozen” 36-month AFC would remain available to Plan 1 employees as they would be entitled to the higher of the frozen 36-month AFC or the then current 60-month AFC at retirement.

Increase Member Contributions to 6 Percent for Certain State Employees (Beginning July 1, 2012)

·         Increase member contributions to 6 percent of payroll for those newly employed or reemployed following a break in service, on or after July 1, 2012. Phase in the higher contributions for current employees and employees who transfer without a break in service at the rate of one-half percent per year.

·         The General Assembly established a 5% employee contribution in the 2011 session. However, that contribution was offset 100% by a concurrent 5% pay raise for all impacted employees.

·         The increase would apply only to general state employees and state law enforcement. Judges, teachers, and other local employees would be excluded.

Optional Hybrid Plan Bill

New Optional Hybrid Plan (For Certain State Employees) (Effective Jan. 1, 2014)

·         Provide an optional combination plan for new hires and existing state employees, including state law enforcement, that includes a defined benefit component with a multiplier of 1.0 and a required employee contribution of 4 percent, coupled with a defined contribution component that includes a required employee contribution of 2 percent and a corresponding matching contribution from the employer of 1 percent. The legislation further allows for optional additional employee contributions of up to 4 percent which could be matched by another 2.5 percent from the employer. Maximum contributions to the defined contribution plan could be as high as 6 percent from the employee and 3.5 percent from the employer, for a total of 9.5 percent.

·         Employees who, under present law, already have a choice of an Optional Retirement Plan would not be offered the new hybrid plan. These employees include college faculty, political appointees and employees of the Virginia Port Authority, Outdoors Foundation and the teaching hospitals. Judges, teachers and other local employees would also not be covered by the new hybrid plan.

·         The employer’s contribution to the defined benefit component of the hybrid plan would be determined actuarially in accordance with § 51.1-145.

·         The plan as drafted establishes a 6 percent mandatory contribution by a hybrid plan member (4 percent to defined benefit component and 2 percent to defined contribution component), making the mandatory contribution no different than the member contribution to the legacy defined benefit plan for state employees.

·         If a current employee opts for the hybrid plan, his service in the defined benefit plan would transfer at the previous multiplier (1.7 percent, 1.85 percent, or 2.0 percent) but accrue at 1 percent thereafter.

·         An employee’s election is irrevocable. New employees will have 60 days to make the election; the existing defined benefit plan will be the default for those employees who fail to make an election within 60 days. Current employees (as of Jan. 1, 2014) will have 120 days to choose between the hybrid and the existing defined benefit plan; the default will be to remain in the existing defined benefit plan.

·         State employees opting for the new hybrid plan will be covered by the same disability plan available to all state employees (the Virginia Sickness and Disability Plan).

·         The new hybrid plan will use the existing § 457(b) and § 401(a) plans for the defined contribution component. IRS annual contribution limits will apply.


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