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Northam looks to spend $100 million to reduce teacher retirement liabilities

RICHMOND — Gov. Ralph Northam is proposing a new way to help local school divisions in Virginia by using $100 million in state cash to reduce retirement and health care liabilities for teachers.

In the revised budget he will present to General Assembly money committees Wednesday, Northam will propose to pay off a $61.3 million debt that the state incurred 10 years ago when it deferred contributions to the teacher pension plan to help balance the state budget after the Great Recession.

The governor also wants to use $38.7 million in one-time money to pay down unfunded liabilities for teacher and state employee retirement health credits and other post-employment benefits.

The proposed actions would save the state an estimated $24.5 million in payments from its general fund and about $37 million for local governments, which pay two-thirds of the cost of pension and other retiree benefits for teachers.

“It’s reducing liabilities, it’s helping retirees and it’s helping localities,” Secretary of Finance Aubrey Layne said in an interview. “Good things happen when you get your balance sheet in order.”

The proposal is part of Northam’s strategy to weather the recession caused by the COVID-19 pandemic by protecting state employees’ jobs and public services, while using unappropriated cash for one-time investments instead of ongoing spending that the state may not have revenues to sustain.

The governor and General Assembly budget leaders are concerned about structural imbalance in the fiscal year that will begin July 1 because of reduced revenues from the pandemic.

For local governments, the state proposal to reduce retirement liabilities is a way to help them with the costs of K-12 education, generally their biggest expense, at a time when the pandemic has reduced enrollment — and potentially state per-pupil reimbursements — and threatened their school budgets.

“It’s great policy because it’s using cash that will result in multiple-year benefits for both the state and localities,” said Neal Menkes, a fiscal consultant to the Virginia Municipal League. “By reducing the liabilities, it’s also reducing pressure on [employer] contribution rates.”

The state and local governments share the cost of pension and other post-retirement benefits for teachers, who constitute the largest retirement plan administered by the Virginia Retirement System.

The plan covers pension obligations for more than 150,000 teachers plus more than 102,000 retirees and about 67,000 former employees who contributed to the retirement trust fund.

The General Assembly sets the contribution rates that state and local employers must pay, but the cost is higher for local governments because they must cover their share of the costs for employees covered by the Standards of Quality for public education, as well as the entire expense for additional employees not covered.

Jim Regimbal, a fiscal consultant for the Virginia Association of Counties and the municipal league, said Virginia would be wiser to use one-time funds to reduce shared retirement liabilities instead of putting it into financial reserves that earn low interest.

“It’s a form of reserves that actually is working for you,” he said Monday.

Regimbal also suggested that Virginia may be able to change its approach to using one-time revenues from a new tax on electronic skill games. The interim budget adopted by the General Assembly in October would use about $95 million in those new gaming revenues to offset expected losses in state sales taxes dedicated to public education. However, sales tax collections have been much stronger than expected in the current fiscal year.

“Use that one-time [skill machine] money for this one-time deposit to VRS,” he said.

The General Assembly has recognized the advantage of paying back about $1.2 billion in contributions the state deferred to the state employee, teacher and three other retirement plans in 2010 to balance the two-year budget without layoffs and deep cuts in programs.

The state already has paid back contributions deferred to the state employee and other plans, but it still owes $61.3 million for the teacher plan by the end of this two-year budget in mid-2022.

Northam will propose to pay off the debt at the end of the current fiscal year on June 30. He also will propose to reduce the liabilities for other post-employee benefits, such as retiree health credits, which are currently underfunded and require higher ongoing contributions by state and local governments.

“The lower we can push down these liabilities, the better it is for everybody,” Layne said.

VRS officials say the payment will not affect employer rates in the current two-year budget, but will result in lower costs in the next budget.

“The extra money coming in will essentially moderate future rates,” said Rory Badura, senior staff actuary for the retirement system.

The proposed payments also would partly offset the higher rates that the state and local governments already have begun to pay since the VRS decided last year to lower its expected long-term annual return on investments from 7% to 6.75% a year.

The decision reflected diminished expectations for investment income that pays for most of the retirement costs for almost 750,000 active, retired or inactive employees in the $85 billion system.

The lower the investment income, the higher the contributions that state and local governments must pay in their annual budgets. The lower investment return is estimated to cost $216 million a year in contributions from public employers, including about $94 million a year from the state general fund budget, which relies on state taxes to pay for core government services.

“Anything that is going to reduce what localities have to pay is basically kind of a recurring savings, so localities can put that to work right away,” Menkes said.


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