Governor's budget to include $2.2B for pension system

By BOB LEWIS

RICHMOND

Virginia's underfunded public employee pension system would get a $2.2 billion infusion over the next two years and state employees would receive 3 percent bonuses just in time for Christmas 2012 under a proposal from Gov. Bob McDonnell.

The retirement system contribution, requiring total outlays of about $1.2 billion from state government and the rest from Virginia's cash-strapped cities and counties, would be the largest employer contribution ever to the Virginia Retirement System.

The proposed one-time bonus, at a cost of about $77 million, would be included in state employee paychecks in December 2012, provided they can generate state operating cost savings of at least $160 million by then.

McDonnell said both ideas would be included in the biennial budget he presents Monday.

What McDonnell would not disclose Thursday, either to reporters or to state employees, is whether he would renew his push for state employee contributions to their pension plans. Last year, he proposed a net 2 percent employee pension contribution, but the General Assembly rejected it.

With VRS' unfunded liabilities topping $20 billion and the fund well below its minimally acceptable funded ratio of 80 percent, McDonnell said the scope and immediacy of the problem demanded a historic financial commitment by the state.

"This problem is so severe I will not pass it on to another governor," McDonnell said.

"I've got to be able to look state employees in the eye and say, 'If you do these things and the state does its part, we will guarantee that that money will be there at the end of the road.' "

Unfunded liabilities at VRS have worsened in recent years from stock market losses and from a graying state workforce easing into retirement. The unmet liabilities increased by about $1 billion over the past year, McDonnell said.

The VRS encompasses a total of 338,120 active state and local government employees and 165,520 retirees or beneficiaries.

The state's contribution will cover state employees and the state's share of an employer contribution for school teachers, who are local employees. Localities will have to pick up the bulk of the employer share for teachers.

In Chesapeake, Superintendent James Roberts said at first glance, the governor's proposal could cost Chesapeake schools between $3 million and $4 million. That's 60 to 70 positions, he said.

Roberts cautioned the governor hasn't yet released his complete budget proposal, which could still provide some relief to schools. State funding has fallen in the past few years - Chesapeake alone has lost $42 million, he said.

"We are already looking at a massive shortfall," Roberts said. "This could be devastating."

In Suffolk, Budget and Planning Director Anne Seward said that whatever the state decides to do to make up the underfunding of school employee pensions, it is sure to mean "an increased cost for the city's public school system, which, of course, they're going to look to us to pay a certain percentage of."

That is likely to create "another budget challenge" for the city next spring.

A study released Monday by Joint Legislative Audit and Review Commission, the legislature's investigative agency, reported that the funded status of the state employees' plan had declined to 70.6 percent, and the school teachers' plan had dropped to 66.6 percent. Without intervention, the two plans could erode by 2013 to 63 percent and 61 percent, respectively, the agency said.

Next December's bonuses would be a repeat of a one-time pay boost state employees received last December, when budget-cutting efforts saved the state $174 million. But bonuses aren't permanent, and some state workers asked McDonnell why the state can't at least boost salaries to meet cost-of-living increases.

At a roundtable with the governor Thursday,

Bill Harlow, who works for Tidewater Community College, said whatever employees receive in a bonus is devoured by rising government costs, even if McDonnell doesn't require an employee pension contribution.

"That's especially true in Hampton Roads, where we have a lot of new expenses coming up - new tolls on the bridges, tunnels, and essentially we can't plan for that," Harlow said. "That's a monthly expense, not just a December expense."

He said his latest permanent salary increase came four years ago.

Pilot writers Dave Forster, Hattie Brown Garrow, Elisabeth Hulette and Jeffery Sheler contributed to this report.