House Speaker wants new commission to study retirement system, reforms

“I think we made some good first steps … (but) I think we haven’t solved the problem,” he said in an interview with the Richmond Times-Dispatch.

Howell expressed concern about the size of the state’s unfunded liability for state employee and teacher pensions — estimated at almost $21 billion — and the need for a new, more portable package of retirement benefits as the state faces a major turnover in its aging workforce.

“I think it’s more than just fully funding the pension plan,” he said. “I think you ought to look at changing the plan.”

Watkins’ concerns

Howell, a member of the House since 1988 and speaker since 2003, long has advocated a 401(k)-style defined contribution plan instead of the state’s traditional defined pension benefit or the hybrid approach adopted as the centerpiece of reforms in 2012.

But a chief architect of those reforms said the General Assembly should not rush to judgment on the need for further changes in the system.

“To arbitrarily say we’re going to change it, I don’t think that’s prudent,” said Sen. John Watkins, R-Powhatan, who will retire from the Senate in January. “You can’t keep changing it just to change it.”

VRS Director Patricia S. “Trish” Bishop said the system would assist a new commission in studying pension issues if the legislature requests it.

“As we’ve done previously with various pension reform initiatives, VRS stands ready to work with the legislature to provide data and analyses,” she said Friday.

However, VRS just completed a study of a “cash balance” alternative — a portable retirement plan that would guarantee a floor of benefits to participants — under legislation the General Assembly adopted this year at Howell’s request.

The study, issued this month, raises concerns about the costs of implementing a new type of retirement plan and adding complexity to a system that already has three classes of employees based on differing pension benefits.

It estimates that creating a new retirement plan could cost $12 million to $13 million and delay a long-awaited modernization of VRS information technology by an additional 18 months.

Unfunded liabilities

The report said a new type of plan — which would vary widely in its effect, based on how much savings and interest an employee would be guaranteed — also would not affect the state’s obligation to pay off current unfunded liabilities. They are estimated at more than $6.5 billion for state employee plans and $13.1 billion for teacher retirement benefits shared by the state and local school divisions.

“As a result, regardless of the plan design used for future employees, the employer contribution rates will still mostly be made up of amortization payments to pay down the unfunded liability associated with prior benefits,” VRS states in the new report.

Instead, the report suggests that the state consider making changes to the hybrid plan, which took effect Jan. 1, 2014, for most newly hired state and local government employees, and teachers.

‘Upside down’

The plan’s design long has rankled state employee advocates, who say workers pay too much toward their defined pension benefit and the state pays too little toward the contribution plans on which employees will rely to replace their income when they retire.

“The hybrid is upside down,” said R. Ronald Jordan, executive director of the Virginia Governmental Employees Association.

Under the current plan, employees must contribute 5 percent of pay toward their retirement benefits, but 4 percent goes toward the defined pension benefits traditionally paid for by government employers. Only 1 percent of the mandatory employee contribution goes into a 401(k)-style contribution plan that the worker controls.

Two other classes of state employees — those with benefits vested before the first wave of pension reforms took effect on July 1, 2010, and those “Plan 2” workers hired afterward with reduced pension benefits — contribute 5 percent of pay toward their defined retirement benefits.

But those employees’ contributions pay a significantly smaller percentage of the annual cost of the pension benefit than do contributions under the hybrid plan, so VRS said a change in the allocation of the employee’s contribution “may be worth exploring.”

One potential change would shift 1 percentage point from the employee to the government employer to pay for the defined pension benefit, which also would increase the amount of money the employee contributes to his or her savings plan.

The report suggests that the legislature find ways to encourage employees to contribute more to their retirement savings plans than required, which fewer than 10 percent of those currently enrolled in the hybrid plan do.

“These potential changes result in a relatively modest impact on employer costs, but could provide more favorable outcomes for hybrid members,” the report states.

Aging workforce

State policymakers and VRS officials share concerns about how to attract and retain new employees to replace workers who are expected to begin retiring soon in great numbers.

A report to the House Appropriations Committee by its staff this week finds that the state workforce “is significantly older” than the national workforce, particularly between ages 50 and 59. The average age and years of service for state workers has increased since 2008, as the percentage who are eligible to retire now or in less than five years.

“I was struck by the finding we have one of the oldest state workforces in the country,” Jordan said. “It tells you you’re facing a huge brain drain, and it puts the commonwealth’s ability to provide good quality government management at risk.”

The agencies with the most employees eligible to retire in less than five years are State Police (who are exempt from the hybrid plan for new hires), the Department of Transportation’s Richmond District, the Central Virginia Training Center in Lynchburg, and the Department of Taxation.

Retirement benefits are one way the state traditionally has attracted and retained workers for state jobs that pay significantly less than comparable positions in the private sector, but turnover has increased in the first three to five years of employment for workers 35 years old or younger.

Howell said the changes in the makeup of the workforce require “making our retirement system a little more portable.”

The current retirement system “isn’t satisfactory in that it doesn’t fit the needs of today’s employees, who tend to move from job to job,” he said.

Jordan said changing the allocation of employee retirement contributions to put more money in their 401(k)-style savings plans “should make it more portable, while still preserving the benefit you have to live on.”

Voluntary contributions

One of the biggest concerns about the hybrid system is the lack of voluntary contributions by employees to their savings plans beyond the 1 percent that is required under the law. The state matches that 1 percent and up to an additional 1.5 percent. Employees can contribute an additional 4 percent.

Currently, 28,526 employees are enrolled in the hybrid plan, compared with more than 312,000 active employees in the two defined benefit plans. Of those in the hybrid plan, 91 percent don’t make voluntary contributions to their pension savings plans.

Most of those who do are better paid, making at least $70,000 a year, and part of the state retirement plan for judges. About 80 percent of people enrolled in the hybrid plan earn less than $50,000 a year.

VRS has increased voluntary participation from less than 4 percent to about 9 percent of employees in the hybrid plan, which automatically increases employee contributions by a half-percent every three years unless they opt out.

But those who contribute only the minimum would only have retirement income equal to 33.4 percent of their pay, compared with 45 to 48 percent for those in defined benefit pension plans and 52.5 percent for employees who contribute the maximum in the hybrid.

House Appropriations Chairman S. Chris Jones, R-Suffolk, said any new study would look at ways “to continue to reduce the liability on the part of the state, but also provide adequate replacement income for the employee.”

Jones said last week the committee will favor paying an additional $25 million in the next two-year budget to pay the full retirement contribution for state employees recommended by VRS, which would be two years ahead of a schedule adopted under reforms in 2012.

He also said he favors a study of all compensation and benefit issues to address concerns about turnover in the state workforce and the ability to hire and retain new workers.

“It’s got to be a comprehensive approach,” Jones told the committee at its annual retreat in Chantilly.