RICHMOND — Despite a concerted push to overhaul Virginia’s retirement system for public employees, a high-profile proposal to offer them an optional 401(k)-style plan would not save the state significant money over the next decade, according to a report released Monday.
The legislation providing for such an optional plan for state and local employees was introduced during this year’s General Assembly session by Delegate Lacey E. Putney, Bedford independent, and was backed by Gov. Bob McDonnell as part of a package of public-pension reforms.
But cumulatively, if the plan as outlined in the bill was offered to state employees and teachers, between $197 million and $944 million in additional costs could be expected through fiscal 2022, according to the report from the Joint Legislative Audit and Review Commission, the General Assembly’s investigative arm.
The wide range assumed a higher participation rate and a maximum state match, while the low end assumed a 5 percent participation and a minimum employer match.
“I would guess that the General Assembly members weren’t entirely pleased with what they heard,” said Mary Jo Fields, research director for the Virginia Municipal League, a nonprofit, nonpartisan association of local governments in the state.
Still, Virginia legislators are pushing to move away from the current defined-benefit system in hopes of shoring up the state’s pension plans, which now face nearly $20 billion in unfunded liabilities. The trust fund’s value sits at $49.6 billion, down from $54.3 billion in March.
“Defined benefit is a dinosaur,” said Delegate Harvey B. Morgan, Gloucester Republican. “Over time, it’s not going to be sustainable.”
A theoretical combination plan, which included both defined-benefit and 401(k)-style components, could result in cost reductions from $5.6 million to $118.7 million for state employees through 2022, the report said. Combined with the plan for teachers, the low cost estimate would save the state $220 million, and the high cost estimate would cost it $61 million.
Much of the existing pension problem is simply math.
“It’s unsustainable for a person to be retired at 55 and be retired for 40-some years,” said Sen. Walter A. Stosch, Richmond Republican.
Added to that, the number of retired state employees in Virginia has increased from 39,252 in 2005 to 52,480 in 2011, and the number of retired teachers has jumped from 50,532 to 71,010.
But state lawmakers also have long approved contribution rates below what the retirement system’s actuary has recommended. Since 1992, the state employees’ plan rates have been fully funded in only four years, and the teachers’ plan rates have been funded in only two years, according to the report.
Mr. McDonnell supported a plan during this year’s legislative session that would require all state employees to pay into their pensions for the first time since 1983. A 5 percent employee contribution would have been partially offset by giving employees a 3 percent raise.
But the General Assembly balked at the proposal, instead opting to require employees hired before July 1, 2010, to pay 5 percent of their salaries into their pensions in exchange for a 5 percent raise. Those hired after that date already had to pay into the system.
“Looking at the [problem] of who shares the cost is always controversial,” Mr. Stosch said. “Getting employees to understand what’s in their best interest is part of the challenge.”