Under the cover of darkness

Late on Saturday evening, the Senate and House of Delegates rushed through a 21 page conference report of SB 497, SB 498, and HB 1130 (Senate Finance Committee summary) that brought sweeping changes to the Virginia Retirement System. Passage came within minutes with little discussion and no fiscal impact statement. From early reports (many of which are vague because even those who voted on the bill aren't clear about the impact of all its provisions) it seems the General Assembly is putting the burden of reform on many local and state employees. Some key points -

Employees who are not vested (less than five years service) and those hired after July 1, 2010 will see three changes that will reduce benefits -

• The multiplier used to compute benefits will be reduced to 1.65% from 1.70%,
• The cost-of-living-adjustment will be capped at 3% rather than 5%,
• Average Final Compensation will be based on the average of the highest five years instead of the current three years.

Employees with currently less than 20 years of service who retire before age 65 will have to wait until that age for any cost-of-living-adjustment.

Beginning January 1, 2014 new hires will have a pension system that is part defined benefit (with 1% multiplier) and part defined contribution. The employee will pay 4% of salary into the defined benefit portion and 1% into the defined contribution portion. The employer will match up to 3.5%.

It appears there are no changes for those who are currently retired nor for those with 20+ years of service.

According to the Virginia Education Association, teachers as well as state and local employees will pay more and get less in benefits -

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.

Senator Creigh Deeds explained in a recent email newsletter why he voted against the VRS bills -

I am concerned that we are imposing on local governments a mandate with an unknown cost. I asked pointed questions during the briefing about the effect of the plans on retirement benefits and about the cost to local governments and did not receive answers that quieted my concern. I am also concerned that we are providing a disincentive for people to work in public service. It is important that we not only maintain trust with those people who are already vested in VRS (and these bills do not affect those people who are vested), but that we provide an incentive for highly qualified and talented people to come to work in public service. The bottom line is that there were too many unanswered questions for me on all of these bills.

Senator Deeds went on to state that the best way to restore VRS is to "simply pay into the system what the trustees propose" and what actuaries say is prudent.

Over many years the General Assembly and governors have intentionally underfunded VRS and used the money for other pet projects. The result is a retirement system having $24 billion in unfunded liability and falling below the sound benchmark of 80% funded. Now our "citizen legislators" want to balance the books on the backs of many state employees, local employees, teachers, law enforcement offices, and judges. And because of the rush job on these bills they can't even tell us the effects on the fund's viability or  on hiring and retaining a qualified workforce to carry out core services of the Commonwealth.

Even retirees and those with 20+ years of service, who apparently are held harmless by these bills, should remain vigilant. With so many unknowns and inadequate funding their benefits could be in jeopardy when the 2013 legislature convenes.

Governor to state employees... you'll have to pay for state's mismanagement

According to a recent study commissioned by the General Assembly, the Virginia Retirement System (VRS) is underfunded by $18 billion. In his budget proposals, Governor Bob McDonnell will likely tell state employees to pick up some of the tab for restoring the system. With pay raises unlikely, that will be a pay cut for the Commonwealth's workforce.

One might ask why the VRS is ailing. Well, the simple and honest answer is because for several budget cycles the General Assembly and governor have cut the state's, local governments', and school boards' contributions below what was prudent to maintain a viable system able to meet its obligations. They've also borrowed from VRS to patch holes in the budget. They assured everyone that these actions would not endanger VRS' balance sheet. Due to policymakers' own actions the VRS is in some difficulty and those same policymakers want someone else to pick up the tab.

If that sounds unfair... it most definitely is. A quarter century ago the state (also most local governments and school boards) picked in the employees' 5% share of the contribution in lieu of a pay raise. In response to some skepticism, policymakers promised it would be permanent. Then last year legislation passed requiring new employees to pay that 5% themselves. At least newbies understood the deal when they took the job. Now the governor wants all employees to pick up (as yet undisclosed) some of the so-called "employees' share." If the state does so, it is probable that local governments and school boards will follow suit - like state employees, most teachers, police, and other local employees would effectively face a pay cut after several years without pay raises.

The governor's proposal is bad policy that breaks faith with the men and women who perform valuable services for the citizens. The General Assembly should reject this idea, restore rational contribution rates for VRS, begin paying back money borrowed from VRS, and delay funding new pet projects of the administration until current obligations to VRS are met.

It is a good deal... let me find the credit card

Governor Bob McDonnell wants to take advantage of low construction costs brought on by the slow economy to jump start road building in the Commonwealth. His transportation plan calls for spending about $4 billion over three years to ease congestion and, as a side benefit, to create much needed jobs. Laudable goals. Road construction has languished in the Commonwealth while congestion has gotten worse. Folks in road building could certainly use the work. With costs, both highway construction and interest rates, at near historic lows now could be the time to get more miles for the dollar.

But... there's always a "but" isn't there... make no mistake about it, the Commonwealth will have to go deeper into hock to pay for the roads. Unfortunately the governor's plan fails to address just how we'd pay back those loans. Delegate Ward Armstrong (D-Henry Co.), House minority leader and a potential gubernatorial candidate, issued a press release saying of the plan,

This is just the latest in a long line of irresponsible and half-baked ideas that fail to address our core problem of generating a long-term sustainable source of funding for our transportation needs...

So where would Governor McDonnell find the dollars? He says some of the money would come from saving and unspent funds of over $1 billion "discovered" in a recent VDOT audit. So, that really doesn't represent much new spending, but rather money that is already in the pipeline for maintenance and other projects. The governor's plan anticipates $700 million from as yet unrealized future surpluses and from privatization of state ABC stores. Perhaps this is his way of pressuring the General Assembly into moving ahead on his plan to sell the liquor business, but legislators are far from being sold on deal, especially in light of a recent report of the Joint Legislative Audit and Review Commission questioning administration numbers. According to JLARC, the "profits" would be closer to $300 than the $500 million the governor projected. Plus, while it would be upfront money that could be used for current transportation, the sale would mean a loss of state revenue each and every year in the future.

Beyond that, the governor plans to borrow $2.9 billion in a mix of state-backed and federal-backed bonds. The $1.1 billion federal-backed bonds, it appears, are repaid from future federal transportation grants-in-aid to the Commonwealth. So, we'd have future loss of revenue from the sale of ABC stores, loss of some future federal transportation aid, and future interest payment to service the increased debt. And the Commonwealth already has obligations to repay money to VRS and for other bonds that helped balance previous budgets.

It is irresponsible to spend money without clear plans and a reliable revenue stream for repayment of the debt to be incurred. Future governors and legislators will be forced to choose between core services such as schools and public safety or raise taxes. As Delegate Armstrong noted,

When you don’t pay now, someone has to pay later. Unfortunately the Governor’s lack of leadership on transportation has resulted in a plan that amounts to a back door tax increase on our children.

Perhaps now is the time for the Commonwealth to revamp its gas tax. Start a process of small periodic increases in the current 17.5¢ per gallon state gas tax to raise it to a level consistent with inflation. That rate was set in 1985 and its buying power is closer to 8¢. But, the governor seems dead set against that - he'll just max out another credit card.

HindSight, ForeSight

A family member is a member of VGEA, the Virginia Governmental Employees Association. In the past couple of months their newsletter, ForeSight, has been showing up in the mail... actually on time and with real news and commentary. In the past many saw VGEA as a weak step sister of similar organizations in the Commonwealth. Compared to the Virginia Education Association, for example, VGEA seemed impotent and largely ignored by legislators and the governor. On key issues of pay, of the Virginia Retirement System, and of working conditions it was hard to see how VGEA had much impact.

Things seem to be changing under the leadership of executive director R. Ronald Jordan and president William Dunlap. Communication with members is improving. Advocacy will hopefully be more forceful. If so, members will be more energized and engaged... which is the most vital way employee groups can exert influence. Kudos to those leaders and members who are moving VGEA towards greater influence - it is about time state employee voices were heard loud and clear.

Something borrowed, something blue

It is widely reported that the Commonwealth's 2010 budget "surplus" has nearly doubled to $404 million. While it is only a "surplus" in the sense that very cautious figures were used in drafting the original budget, the news is nevertheless welcomed. The question now is how to allocate the "found money."

Governor McDonnell had previously promised state employee a 3% year-end "bonus." He and the General Assembly should live up to that commitment... or better yet, make it a permanent pay raise. It has been four years (well before the recession began) since state employees received one and they've taken hits on some benefits. It will go a long way to helping to build morale.

Another priority should be repaying the Virginia Retirement System for money the General Assembly borrowed to help balance the budget. This year alone the state put off $137 million in contributions to VRS. Restoring those contributions will be a giant step toward assuring the stability and long term viability of the system.

Trickle down budget writing

In its infinite wisdom (and as a great illustration of how all sh*t flows downhill), the General Assembly has passed a budget that allows local governments and school boards to require current employees to pay from 1% to 5% of the "employee retirement contribution." This provision in the budget does not affect state employees.

The General Assembly has dramatically underfunded local schools - for example, I just heard on the news that Augusta County Schools will have some $11 million less to operate on next year when compared to this year. To make up the difference, a local school board can start making employees contribute to the Virginia Retirement System. Some 20 years ago most local school boards picked up the so-called "employee share" of the contribution in lieu of a pay raise. It was supposed to be permanent... forever and ever, amen.

I'll break this down in simple terms that even Republican budget writers can understand - you underfund local school divisions, but you thoughtfully give them the power to find new money to help fill the gap you created from somewhere, from anywhere... why not scrape it out of employee wallets. Now, that's what I call trickle down budgeting... it really does all flow downhill.

Schools, VRS, public safety take heavy hits

The first reports about the Virginia General Assembly's budget actions are hitting the media and everything is a bit sketchy. The Senate gave in to the House on a majority of the fee increases so many of the cuts hit bone. Some emerging details:

• K-12 education will see $646 million less over the next two years meaning teacher/staff layoffs, school closings, and larger classes. Apparently the Senate held tough and prevented the even more drastic cuts proposed by the House of Delegates.
• As predicted in an earlier post, judges who retire or die will not be replaced. Full dockets. Backlogs. Irate citizens. Justice delayed. Justice denied.
• Although some of the worst proposals for the Virginia Retirement system were averted, the system takes still another hit. In the past couple of years the state has underfunded the retirement system and now the General Assembly is borrowing $620 million from it. I don't trust them to repay it - do you? What recourse will members have - can we sue the bastards?
• $1 billion was cut from health programs. Only 250 additional adults with mental disabilities will receive community-based services - the waiting list tops 6,000. A human and a public safety disaster.
• Funding for sheriff's offices drops by 6%. Expect slower response times, a reduced presence of resource officers in schools, and fewer crime prevention programs.

But rejoice. The rest areas are reopening even as the potholes grow big enough to gobble up a Prius. Maybe the pedal will stick and it will fly over it!

Feeling the sting

With the budget deliberations not yet finished in Richmond, local school divisions are deep into crunching numbers and getting ready for fewer teachers and other staff, and for larger classes. With most school divisions' budgets heavily weighted towards personnel - typically 75 to 80% (or more) goes to salaries and benefits - the cuts this year will mean paring down the employee rolls. Most school divisions are trying to do that in as gentle a way as possible, but when the knife cuts to the bone, there is bound to be pain.

One way to pare costs is to encourage experienced teachers to retire and leave positions vacant or replace them with "cheaper" new hires. But, how to do that? Some teachers enjoy their work and involvement with children and are not ready for retirement. Others need the paycheck. The cost of health insurance is a huge concern for almost everyone. Retiring before 30 years of VRS service means taking a hit (which grows when multiplied by the number of years under 30) on the pension. So, school divisions are offering financial incentives to help ease some of those very real fears.

Augusta County has a retirement bonus of $200 per year of creditable VRS service up to $6,000 for staff age 50 and up who retire between March 1 and June 30. They already pay $2,500 towards retiree health insurance (subject to certain stipulations) which helps to ease that concern. Still, there is doubt that $6,000 is enough to attract very many who were not already pretty close to a retirement decision. For anyone under 30 years of service, the hit on VRS benefits likely weighs heavier on the calculations than that one-time payout.

The Staunton Public Schools, which is probably going to close one elementary school, has a more generous retirement incentive. Ditto for Waynesboro - $300 per year of service, up to $9,000. Shenandoah County is considering one. The story is pretty much the same everywhere - get rid of teachers and other staff to save money. Roanoke City and Roanoke County are offering larger buyouts - the city's maxes out at $20,000 and the county's at $12,500.

Statewide, the respected budget analysts at the Virginia Education Association, estimate that the Senate budget will cost almost 16,000 jobs; the House budget about 24,000. These wouldn't be just teachers, but include everyone from cafeteria workers and custodians to assistant superintendents. With the budget likely to fall somewhere in between, job losses of somewhere around 20,000 are likely. I'm sure with less money the fine folks in the General Assembly will relax some mandates, perhaps suspend SOL tests for a couple years, and help in other ways. Do you believe in fairy tales?

Nobody expects the retirement incentive programs to reduce staffing by anywhere close to those numbers so teachers who are not on continuing contract (three years of satisfactory service in the same school division) are holding their collective breath and wondering if they will receive a reduction in force notice. We can probably expect many to be issued, followed by an night of fear, anger, and tears. Hopefully, some will be rehired if the number of retirements is higher than expected or the budget improves. So, you DO believe in fairly tales?

There is some lip service to class size and maintaining the quality of instruction, but - so there is a Puff the Magic Dragon? - have no doubt, classes will be larger (some to the point of chaos), students with special needs will have less support, many of our best and most experienced teachers will be gone, new teachers will be asked to teach subjects for which they are not prepared, and our children will ultimately pay the price for the bad economy and failures of vision in Richmond. First lesson... life isn't fair.

Broken Promises?

It appears Governor Tim Kaine will suggest breaking a sacred promise to state employees and propose that the Commonwealth force state employees to pay part of the contribution to the Virginia Retirement System. Currently the state pays the 5% "employee contribution" and has done so since the late 80s (I may need correcting on the date) in lieu of pay increases. At the time, the state and most local governments and school divisions "promised" this was a permanent commitment.

Governor Kaine will propose that the state reduce the employee contribution rate to 3%. Last fall he reduced contributions to VRS by $104 million - he helped balance the budget, but weakened the balance sheet of the retirement system with that move.

If the Governor, Governor-elect, and the General Assembly go along, faith will be broken and state employees even more demoralized than they are currently. Trickle down - local school boards and local governments will follow suit, breaking the promise they also made to employees. Most state employees, teachers, and others in VRS understand why they've gotten no recent raises, and won't in the foreseeable future.... but, they won't understand this broken promise to balance the budget.

Counting the Dwindling Corn

Governor Tim Kaine announced a series of steps to meet the 2010 budget shortfall of $1.35 billion. Some savings were found in various efficiencies and reducing spending in state agencies based on those agencies' own recommendations. Many of those will not be immediately felt by the public although over time services will be impacted.

Several of the governor's actions, required by the magnitude of the shortfall, will directly impact families, programs, core services, and state employees. Among them:

• Some 929 state jobs will be eliminated requiring 593 layoffs.
• Higher education will be hit to the tune of 13-15% reductions. For UVA that is about $19 million - which has to hit everything from buildings and grounds to instruction. It will be especially difficult for community colleges which cannot turn students away. Expect bulging classes, the elimination of some classes/programs, more snow-covered parking lots and sidewalks.
• A one-day furlough for most state employees - in short, a four-day Memorial Day weekend, with one day unpaid. The loss of a day's pay will be tough on some families, but not as tough as more layoffs that would occur absent the furlough. A little shared pain seems the better of bad options. Public safety and some other areas will be exempted.
• A reduction of $104 million in payments to the Virginia Retirement System. VRS has a reputation of being well managed, but like every other investor has been hammered by the stock market (which is thankfully rebounding). VRS is a sacred trust to state employees and while the state can't raid the funds directly, this backdoor reduction in funding will weaken the system. The Commonwealth must do, as the governor promises, readjust the contribution rates to assure the long term viability of the system.

Kudos to the governor for not taking the boning knife to K-12 education. Along with public safety, K-12 is the most vital of government services. So far, because of the efforts of Governor Kaine and federal stimulus funds, education has been largely spared. Education is the key to our future, our economy, the very fabric of our society and every effort must be made to protect public schools.

Which brings us to a crucial point - it does make a difference who is in the Executive Mansion setting priorities. Bob McDonnell says he'll pay for roads by shifting over $5 billion from education. That's BILLION. McDonnell promises to raise teacher salaries - but it is a shortsighted smoke and mirrors (shift and shaft) scheme that cuts school services such as nurses, counselors, speech pathologists, and other support personnel.

The more we see and hear of Bob McDonnell, the clearer it becomes that the man will say and promise about anything in his desperation to wield power. Talking out of both sides of his mouth... he's ultra-conservative to one audience and a reasonable moderate to another group in the very same day! A vote for Bob McDonnell is like buying a pig-in-a-poke - you never know who, or what, is the real Bob McDonnell.

Fresh litter

Because of the collapsing economy and the budget crisis facing Virginia, the City of Harrisonburg could see a cut of $3.2 million in state aid for 2010. The figures are from projections from the Virginia Municipal League. The same dire predictions are being hashed out in city and town councils and boards of supervisors across the state.

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In a related story, the Virginia Retirement System reports the value of its investments has dropped over $14 million since June 30, about 1/4 of its value. VRS provides pension benefits to 136,000 employees and has over 345,000 active members - state and local employees, school teachers. It is the 24th largest public or private pension fund. Officials said payments to retirees and beneficiaries are not in jeopardy.

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Across the mountain at the University of Virginia, head football coach Al Groh has shaken up his coaching staff. Several assistants, including Groh's son, will retire or "pursue other opportunities." Us chickens know when a head has been chopped off! 

In spite of saying "there are no scapegoats here," the head coach keeps his job. UVA was 5-7 this year. Does this sound like an investment bank taking bailout billions and firing the middle management while the CEO keeps his multimillion dollar salary? No scapegoats here?

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One more story about our collapsing economy. Everything from toilet paper to peanut butter is affected. Popcorn, too? The size of the product shrinks while the price stays the same. But, the shrinkage is not very noticeable to the average consumer. You were shorted a couple ounces of Jiff peanut butter by an enlarged dimple in the bottom of the jar. Individual sheets of toilet paper shrink. Be a smart consumer - learn more at Mouse Print.