As the economy sank, Virginia retirement payments soared

State and local government workers in Virginia enjoy a generous pension program. The state repeatedly has expanded retirees’ benefits over the years, while making sure employees paid nothing toward their retirement.

The economy’s recent nosedive pulled the retirement program’s investment portfolio down with it. Now some state and city officials worry that the pension system’s largess cannot be sustained.

The investment losses were significant enough that the state may have to inject nearly $400 million more into the system over the next two years. South Hampton Roads cities are also having to ante up more money during a period when they, like the state, face budget shortfalls.

Virginia Beach alone has 16,000 city and school employees in the retirement program. Since 2006, the city’s annual payments to the Virginia Retirement System jumped by nearly a third, to $107 million last year from $83 million in 2006. The same is true of Chesapeake, which has 9,000 city and school employees in the system. Its VRS payments ballooned to $57.5 million last year from $43.6 million in 2006. Both cities expect their contributions to increase again this year.

“We’re all paying the piper,” said Vicki Lucente, a Chesapeake assistant superintendent and a former finance official for Virginia Beach schools. “Everything kind of collapsed at the same time.”

State and city officials are considering adjustments to what some view as an unsustainable system. Beach Mayor Will Sessoms, for example, formed a task force to investigate changes. “The private sector cannot afford a pension system like the city and state offer,” he said. “The question is, can the city and state afford it?”

In 1983, the General Assembly wanted to increase take-home pay for employees, many of whom, such as teachers and police officers, were notoriously underpaid. Rather than set aside money for raises, lawmakers allowed the state to pick up the 5 percent contribution to the retirement fund that employees had been paying out of their salaries. Many localities followed suit.

“Because of the tax-efficiency of that approach, it seemed like a novel and clever way to reward public employees,” said Robert P. Schultze, the director of the VRS. “Now, we find ourselves sort of alone in that approach. We are an outlier.”

Virginia has 350,000 active teachers and workers in its retirement system. It is only one of eight states that does not require government workers to contribute to their retirement plans and one of three that pays contributions on behalf of employees, a House Appropriations Committee analyst said.

Many states typically contribute about 9 percent of a worker’s salary into a retirement fund and the employee kicks in an additional 5 percent. States often pay in more for police.

In Virginia, the state kicks in 11 percent of a worker’s pay. It contributes 25 percent of a State Police officer’s salary and 39 percent of a judge’s pay.

Local school divisions have a separate contribution rate for Virginia teachers, and cities are assigned rates that are spread evenly for general and public safety employees. Virginia Beach and Chesapeake, for example, will have to pay upward of 17 percent of city worker salaries into the retirement system next year, according to VRS documents.

Advocates of the current system say it’s part of the deal all government workers agree to: In exchange for a lower salary, they get a better retirement package.

“I don’t see it as a generous plan,” said Ken Pravetz, president of the Virginia Beach firefighters union. “I see it as a fair plan. They’re trading a salary income for the advantage of a more secure retirement.”

Virginia’s system is set up so employees with 30 years of service can expect a retirement benefit equal to about 51 percent of their average final salaries. Typically, however, state workers retire after about 24 years of service and earn a benefit of about 41 percent of their pre-retirement salaries. In 2009, the average benefit was $16,601 per year for retired state workers and $20,708 per year for retired teachers, according to VRS statistics.

The payout for higher-ranking officials such as department heads and constitutional officers can be much sweeter, especially if they have served for many years.

Chesapeake Superintendent W. Randolph Nichols, for instance, will get a retirement payment of more than $190,000 per year – about 85 percent of his base salary – after he retires in 2010 with 51 years of service.

Over the years, the state has sweetened the benefits for employees in different fields – mostly law enforcement or corrections officers – and lowered the age at which retirees can claim full benefits. Schultze said the assembly’s decisions to expand the program were “relatively modest” in comparison to what other states did in good economies.

Virginia’s pension obligations have swelled so much that the state could not keep pace with annual required contributions. In 10 of 18 years since 1990, the governor and the General Assembly chose not to contribute the recommended amounts to the fund, creating a cumulative shortfall of about $500 million, according to a 2008 study by the Joint Legislative Audit and Review Commission.

That means the state and local governments will have to make up shortfalls down the road.

In 2007, the General Assembly unanimously voted to create a higher tier of benefits for sheriffs and State Police. The bill was sponsored by Sen. Kenneth Stolle, R-Virginia Beach, who was a police officer in the Beach for 11 years.

Stolle was elected Virginia Beach sheriff last month. He said some of his police officer colleagues received meager retirement payments of $20,000 per year before changes were made.

“The people that I know, with health insurance costs, just couldn’t make ends meet on that,” Stolle said. “I feel now, and felt then, they deserve better than that.”

Stolle’s legislation has had an especially significant budget effect on big localities that chose to give their police officers a higher benefit. For example, Virginia Beach pays an extra $2.1 million per year into the retirement program as a result of changes authorized by the bill. Chesapeake pays an extra $1.4 million.

Contributing to the rising rates was last year’s economic meltdown, which slashed 21 percent of the retirement system’s investment portfolio. The portfolio is still healthy; officials say it has rebounded from $42.9 billion to about $47.5 billion as of November. But some board members worry about its long-term sustainability if the market falls again and the state is too strapped to make the increasing payments.

“The truth is, these systems have serious funding issues,” said Edwin T. Burton III , a VRS board member and economics professor at the University of Virginia. “These systems need very substantial contributions. The reality is, at no level are you going to get them.”

Chesapeake expects to pay about $3 million more this year to VRS, making it one of the city’s single-biggest budgetary pressures. Virginia Beach plans to pay about $2 million more. School divisions in both cities are also bracing for big increases. “It’s just a question of the magnitude,” said Lucente, the Chesapeake assistant superintendent.

Some lawmakers and political insiders expect the General Assembly to consider changes to the program during the upcoming session. Gov. Timothy M. Kaine said he plans to ask state employees to start paying some money toward their retirement benefits for the first time since 1983. Requiring state employees to kick in 2 percent of their salaries could result in a general fund savings of $45.9 million per year, according to a state report.

Kaine also has proposed withholding VRS contributions for state employees and teachers in the fourth quarter of fiscal 2010, a move that could save the state general fund $104 million and local school divisions $128 million. But it would also add $259 million to the program’s liabilities.

Other ideas include raising the minimum retirement age and limiting cost-of-living adjustments to retirement pay. Most can collect full retirement benefits at age 50, depending on their years of service.

“The first thing we have to look at is what changes can we make for new employees,” said Del. Chris Jones, R-Suffolk , a member of the House Appropriations Committee. “Once we get beyond that, we have to ask in a real candid manner, 'Did that fix the problem, or are there more things we need to do?’”

But change may not come easily. Localities that sign up with VRS cannot, by law, withdraw from the state retirement system without General Assembly permission.

Since 2007, Del. Bob Purkey, R-Virginia Beach, has introduced bills to require new employees to participate in a private-sector-style retirement plan. The measure has failed each time.

“New employees are going to be faced with the reality that they are going to be paying part of their retirement,” said Purkey, who chairs the House Finance Committee. “Not doing so is simply no longer an option. The money is not there.

“The bottom line is this: If we continue the current system, we will have additional layoffs of state and local employees.”

Mike Saewitz, (757) 222-5207, mike.saewitz@pilotonline.com

Aaron Applegate, (757) 222-5122, aaron.applegate@pilotonline.com