Bacon's Rebellion

Democracy Thrives in Sunlight

In Defense of McDonnell’s VRS Reforms

—

by

James A. Bacon
in ,

State employees: stuck between a rock and a hard place.

by James A. Bacon

Yesterday I referred to Gov. Bob McDonnell as an “incrementalist reformer.” That’s not entirely fair. Some of his reforms come in pretty big increments, like his proposal to put the Virginia Retirement System back on a sound actuarial basis. If he can get his plan enacted over the inevitable objections of state employees and their allies, he will have made a major contribution to the long-term fiscal health of the commonwealth.

McDonnell balanced the budget two years ago by shorting the state contribution to the VRS to the tune of $620 million. Now that the state’s financial condition has improved, he plans to make up for that under-funding by injecting $2.2 billion in state and local funds into the VRS during the next two-year budget. Yesterday, he also announced a package of structural reforms to the retirement plan that would close the $19 billion unfunded liability by another $5.1 billion. Public employees would pay an additional 1% of their salary and receive a little less in benefits. (See this press release for the details.)

Says McDonnell:

As governor, I must be able to look state employees in the eye and promise them that their retirement benefits will be available when they choose to retire. Today I can’t do that. By enacting these reforms, we will be able to move closer to guaranteeing that security for VRS contributors. I will not leave this issue to be solved by a future governor. We are all in this together, and this is a basic matter of math. The simple truth is our state retirement system just will not work without both sides of the equation, the employer and the employee, contributing more in the years ahead.

McDonnell would sweeten the deal for state employees by funding a one-time performance bonus of up to 3% in FY 2013. A spoonful of sugar may help the medicine go down, but the medicine still tastes bitter. The bonus is a one-time deal. The extra 1% contribution lasts an entire career. Moreover, it comes atop several years of zero pay raises for state employees. The only consolation for state employees is the knowledge that the reforms will avert a major pension-funding crisis that could jeopardize retirement benefits at some unpredictable time in the future.

I expect critics will pursue two lines of attack on McDonnell’s plan. First, they will say the reforms will reduce the state’s competitiveness in hiring and retaining talent. However, with Virginia unemployment stuck at well above 6% and expected to linger there for a long time, it’s not as if there will be a rush out the doors. If the economy improves and state workers begin seeking employment elsewhere, tax revenues will be rising as well and the state will be able to afford increasing pay or juicing benefits as needed. I’m not worried.

Second, the class warriors will decry the benefit cuts as another attack on the middle class. They won’t advocate cutting other spending programs, so that leaves only the alternative of raising taxes… presumably on the rich. I don’t have the time or space here to re-hash the old rich-are-getting-richer-while-the-poor-are-getting-poorer debate here. Suffice it to say much (not all, but much) of the increasing wealth gap is an illusion. The income of the “top 1%” has crashed since the recession, wiping out much of the gap. Longer-term, changes in the tax code coaxed the rich to declare more income rather than hide it in tax shelters. (See this Alan Reynolds piece for the best discussion I’ve seen on the subject.)

The fact that Virginians, like all Americans, are feeling miserable right now can be attributed to the failure of government policy at two levels. First, the Era of Mass OverConsumption, built upon the accumulation of debt, is unwinding. For what it’s worth, both political parties encouraged MassOverconsumption — no one escapes the blame for it. More to the point, there is no way to avoid a painful readjustment. Second, President Obama’s economic policies are killing jobs. Obama inherited a bad situation… and made it worse.

The way to restore Virginia’s middle class is not by raising taxes to pay more generous benefits to state employees. The way to improve the lot of state employees is to create the basis for a sound, growing economy that generates more tax revenues that the next governor can share with the state workforce. That’s the approach McDonnell is taking, and I applaud him for it.

Share this article

ADVERTISEMENT

(comments below)

ADVERTISEMENT

(comments below)

Comments

13 responses to “In Defense of McDonnell’s VRS Reforms”

  1. larryg Avatar
    larryg

    hmmm….this sounds a lot like the Social Security issue with benefits promised and now we say that cannot be paid.

    Does that mean the State of Va has been operating a Ponzi Scheme?

    When it is said that in order to pay scheduled benefit to Social Security we have to increase FICA withdrawals… it’s an OUTRAGE…!!

    but when Bob McDonnell does this – it’s being “fiscally responsible”.

    and Obama caused McDonnell to raid the pension funds last year ?

    ha ha ha… and who made him tell state employees that now they have to pay for something they were originally promised by the state as compensation for their work?

    I just love the way these narratives get turned about 180 degrees depending on the politics of it.

  2. larryg Avatar
    larryg

    ” …. Second, President Obama’s economic policies are killing jobs. Obama inherited a bad situation… and made it worse”

    uh huh…. who made it worse? Bush or Obama? and who says Obama made it worse? As far as I can tell it’s only those who never liked Obama to start with and now attribute everything from bad breath to hemmroids to his “failed leadership”.

    Blaming Obama for the states failure to fund it’s employee pension plans is a great example of Grade A anti-Obama narrative…. shame on you Jim Bacon.

  3. DJRippert Avatar
    DJRippert

    Jim:

    Your article is interesting but misses an important point (which you, of all people, should see)…..

    I have been told that the accounting for defined benefit pensions differs greatly between private enterprise and the public sector.

    In private enterprise, companies must determine the liability for defined benefit pensions using an independent actuary and auditor. If the amont in the plan is too little for the actuarial calculation of the funds needed to pay out all existing beneficiaries, the company must show that under-funded amount as a liability on its balance sheet. In addition, the annual contribution to the fund is assessed against the amount of additional monies needed to maintain actuarial balance. If the company does not contribute the amount necessary in any year to fully fund that year’s change, the company must take a charge to net income for the difference. Given these rules, an investor can quickly determine if a company is rying to hide a future liability for unfunded pensions. In addition, a CEO cannot falsely inflate net income by failing to make the required payment into the pension fund. If over three consecutive years the value of the pension’s assets is less than 90% funded, or if in any year the assets are less than 80% funded, the company must increase its contribution to the pension portfolio, which is usually in the form of cash. The need to make this cash payment could materially reduce EPS and equity.

    The latest financial statements of Goodyear indiacte the pension fund liability in great detail. The word “pension” is found 101 times in Goodyear’s financial statements.

    I am not an accountant but that is my understanding.

    The public sector is different. Pension fund balances and shortfalls are not included in the financial statements of the Commonwealth of Virginia. However, a discussion of these funds is now required as supplementary material in the financial statements.

    In other words, while a CEO cannot “meet earnings per share” goals by failing to make the required payments to the employee pension fund, a governor can “balance the budget” by failing to make those payments.

    In both cases, the entity has failed to make contractually obligated payments. In the case of the private enterprise company, that failure rolls through the financial statements. In the case of the public entity, it does not.

    All of which exposes yet another fraud perpetrated by our General Assembly – the fraud of claiming that Virginia has a law that mandates a balanced budget.

    Our state legislature is now in session. Perhaps among the bills to provide tax breaks for floating funeral urns and laws to confer personhood on fetuses our representatives might pass a law making a balanced budget mean something.

  4. James A. Bacon Avatar
    James A. Bacon

    Groveton, I totally agree with your analysis.
    LarryG…. What can I say? I cannot follow your logic. Yes, the state was irresponsible to fail to make its payments to the VRS (as I have said repeatedly). Yes, it’s good that the state is putting the money back in. And, yes, it’s good that the state is restructuring the pension plan.

  5. larryg Avatar
    larryg

    I’m pretty sure private corporations do not always fully fund their pensions… no matter what they show on their financials…..

    some companies go broke and turn over the pension liabilities to US taxpayers.

    some companies change the plans from defined benefit to defined contribution and any employee who does not like that is free to do something else.

    some companies now days are hiring new employees at different pay rates and different pension plans than older employees.

    Jim B – “logic”… only to say that I do not see the connection between Obama “killing jobs” and the State of Va not funding it’s pension obligations and Bob McDonnell stealing money from the pensions and then the next year “announcing” …”changes” … that require long-time employees to help make up the shortfall.

    I KNOW the pension plans have to change… but I think it’s pretty dirty to take money from the pension fund one year then turn around and say that because it’s “short” that employees have to help make up the loss.

    It’s not about the “middle class”.. nor “too rich benefits”… or any of that; it’s about fairness and equity for people already employed and promised benefits that the state is now going to renege on. I can see changes for new employees but not vested employees.. that seems wrong.

    When the Fed make this change back in the 1980’s those who were already vested were given the opportunity to choose to stay with the old plan or go with the new one and some carrots were offered.

    Vested employees took the new plan because it was “portable”.

    The state could do right here… but we’re still playing the blame game.

    some of you – are saying that it’s okay to screw over the state employees because they have it “tool easy” and the state can no longer afford it.

    There’s an obvious downside to this. Who is going to believe the state won’t do more of this kind of thing in the future?

    It’s not good enough to screw people over and say it’s okay “because”… people should be treated fairly no matter what the politics are.

    and of course your repeated off the wall – no matter the context shots at Obama.. in much of what you write these days.. I feel obligated to point out..

    what does Obama have to do with Va funding it’s pension plan?
    😉

  6. Hydra Avatar
    Hydra

    I think that “fully funded” assumes some future liability and the time to continue to contribute to it and for current investments to grow. In a downturn the investments do not grow as fast so more contributions are needed, at the very time the corporation (or state) has not got the money.

    In the bad old days, retirement funds were company funds, and a raider could come in, cansel the pension and steal the money. I beleive that nowadays that money has to be held seperate from the corporations assets. Even so, if the company goes under or is shut down and ceases making contributions, the future payments may be underfunded and the governemtn takes over to make sure that pensioners get at least some of their promised money.

    In a 401K however, your money is invested at your direction. If you screw up and invest it all in Enron, well, you are out of luck.

    Notice that you do not hear so much about how much better off people would be with a privatized social security system when the stock market has been in the doldrums or down for a long perisod. One thing people forget about the social security system is this: If you had to invest entirely on your own, you would prudently keep a substantial portion of your retirement money in conservative investments – probably government bonds. Your social security account acts as that protion of your investments, and it allows you to invest your additional savings more aggressively than you would otherwise.

    To the extent that you need some conservative investments anyway, the argument that one would be “much better off” with private investments is false.

  7. DJRippert Avatar
    DJRippert

    Hydra:

    Are you serious? You want me to believe that the government has a good track record with the investment of money? Is this the same government which adds trillions of dollars of debt to the balance sheet each year? How would you react to a private enterprise which added billions and billions of dollars of debt to its balance sheet each year? If you had any sense, you’d sell the stock in that company.

    Social security is a horrible investment. First of all, it’s only “sort of”, “kind of” an investment. Liberals will try to tell you that Social Security is a pay as you go annuity. Of course, this makes the Social Security Trust Fund very hard to understand. Those same liberals will then say that the Trust Fund was only a temporary vehicle to “smooth out” payments during a demographic “hump”. They forget that current payees will only receive about 75% of what current recipients get when that Trust Fund is exhausted. It seems that the “one time demographic hump” is actually a continuous miscalculation by the politicians and government employees who (mis)manage the pseudo-sort of-kind of-sometimes annuity.

    My answer is simple – anybody who cares to remain in the Social Security system should feel free to do so. Anybody who elects to leave the system will have to allocate the same amount of their pay (and their employer contribution) to a private retirement account. The private account will be restricted to certain generally conservative classes of investments. No puts or call, no hedge funds. What percentage of Americans would remain in the government-run Social Security system if they had a choice? I’d guess that only the “greedy grays” who expect to take out far more than they contributed. The rest of us would run like scalded dogs away from that government-sponsored Rube Goldberg device of a retirement plan.

    So, why do you and others want to deny me my freedom to invest for retirement as I choose?

  8. larryg Avatar
    larryg

    for corporate or govt pensions – the “right” way to do it is to keep the existing employees whole but change the deal for new hires. That’s fair and honest and it’s the way that many auto (and other) companies have done it and it’s the wa the Federal Govt did it.

    In terms of the Federal Govt “investing” check out the Thrift Savings Plan that all Fed employees can participate in that is managed by the Feds. It has an EXCELLENT reputation.

    In terms of Social Security – it has the same exact problems that many other pension plans have in that as the number of retirees grow – the demographics are getting upside down.

    SS is ALSO the ONLY Federal Program that I know of that BY LAW cannot pay out more than it takes in. We should be so lucky to have the rest of the Federal budget operate the way that SS does.

    SS has to do what Va is doing. They have to change the plan OR they have to reduce benefits.

    The Trust Fund is not what funds SS – FICA is. People who blather on about the Trust Fund either do not understand that FICA is the funding for SS or they are purposely demagoguing it. Either way – we are getting to the point where ignorance or propagandizing are not acceptable.

    There are dozens of Trust Funds in the US Govt and they all work pretty much the way that SS does. The Federal Gas tax goes into a trust fund until it is appropriated. Medicare Part B premiums go into a Trust Fund until the money is spent to pay benefits. There is nothing unique nor wrong with the SS Trust Fund. It is merely a holding place for FICA monies until they are spent. If money is left over.. it’s called a surplus and it is used during recessions when FICA fails to cover all benefit costs and in the 1980’s FICA was increase to generate a bubble surplus to allow the govt time to gradually phase in changes to FICA/SS because of boomer demographics.

    SS has to do what Va has to do. They have to change the plan by requiring either higher FICA or change the retirement age, etc… to maintain the program.

    Again – SS is the ONLY FEDERAL program which BY LAW cannot pay out more than it takes in. If our whole Federal budget operated that way – we’d not have a deficit right now. SS is the quintessential “balanced budget” program despite the hordes of folks who are ignorant of it.

    If you want to REALLY worry about an entitlement program – worry about Medicare Part B and MedicAid. Medicare Part B is entirely voluntary but it will break the budget in less than a decade if we do not reform it.

    MedicAid is even worse.

    1. DJRippert Avatar
      DJRippert

      What’s wrong with the Social Security Trust Fund is that it disproves Social Security as a “pay as you go” annuity.

      LarryG like to pretend that Social Security has no bearing on US debt. Unfortunately, the GAO disagrees.

      “Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.”.

      LarryG has never quite figured out where the actual cash comes from when the Social Security Trust Fund makes a payment. We all know that the SS Trust Fund has no assets other than special purpose IOUs issued by the Treasure Department. So, when the SS Trust Fund wants some cash to pay beneficiaries it hands the Treasury Department one of those special purpose bonds and asks Treasury for cash. And where does Treasury get this cash? It borrows more money!

      Now, in the real world, if you borrow money to get cash to pay off a debt you cancel out. One debt is extinguished with the cash raised by another debt. That’s because you can’t borrow money from yourself in the real world. But what about the federal world?

      In the federal world the government can take money from the citizens while promising that the money will be placed in a trust fund to be used to pay out that same money later. Then, the government spends the money it collected on aircraft carriers, Nancy Pelosi’s private jet rides and all sorts of other “goodies” which have nothing to do with retirement benefits.

      But the federal government would have to show this debt as a liability on its financial statements, right? I mean the money was taken from citizens with the understanding that it will be used to pay future retirement benefits. And then, the money was immediately spent. So, there’s a liability, right? A liability to the people from whom the government took the money. Right?

      No.

      Again, back to the OMB …

      “Only debt held by the public is reported as a liability. Debt held by government accounts is an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements.”.

      Whoa!!

      So, the government took the money from taxpayers saying that it would be placed into a trust fund. Then, they spent the money and wrote themselves IOUs. But, the IOUs are, themselves, assets. So, even though the money is gone, there is no net liability.

      Man, you sure can do some cool things when you can borrow from yourself.

      So, LarryG … one more freakin’ time …

      Where does the Treasury get the cash to redeem the Social Security Trust Fund Bonds?

      And … if there is no net liability on the government’s books – can redeeming the bonds reduce the liability that doesn’t exist?

      Yes, LarryG … these are the people I want managing my retirement finances.

  9. James A. Bacon Avatar
    James A. Bacon

    Larry, Larry, Larry… You ask, “What does Obama have to do with Va funding it’s pension plan?”

    Nothing.

    Satisfied?

    But I never suggested that he did. I was anticipating an objection to McDonnell’s plan for fixing the pension plan: that asking middle-class state employees to take a hit would undermine the middle class at a time the rich were getting rich and the poor were getting poorer, etc. I then went on to counter that anticipated objection by noting that the pain the middle class is feeling right now is the result of a sharp recession and slow recovery, and finally that Obama’s job-killing economic policies were *partially* responsible for the slow recovery.

    I never, never, never suggested that Obama was in any way coonected to the woes of Virginia’s pension plan. You need to read more carefully.

  10. larryg Avatar
    larryg

    “What’s wrong with the Social Security Trust Fund is that it disproves Social Security as a “pay as you go” annuity.”

    huh? what part of the facts do you not understand? FICA is a payroll tax that gets collected EVERY DAY and EVERY DAY the cash received is converted into treasury notes and EVER DAY older treasury notes are redeemed for cash and EVER DAY SS checks are sent out to people.

    what is left over is called the “trust fund”. Govt trust funds do not work like private trust funds. They are misnamed but there are ample explanations of them. try This One

    “LarryG like to pretend that Social Security has no bearing on US debt. Unfortunately, the GAO disagrees.

    “Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.”.

    when FICA is exchanged for Treasury Notes – it IS debt – public debt but it does not ADD to the deficit or debt. If you “cut” SS it has no impact on the existing deficit and debt. SS does not ADD to the deficit/debt. The ONLY thing that has to do with the deficit/debt is what is in the trust fund but be aware that the trust fund is a small fund relative to the annual revenues (and payouts) from FICA.

    the trust fund has about 3 years worth of SS benefits in it.

    “LarryG has never quite figured out where the actual cash comes from when the Social Security Trust Fund makes a payment. We all know that the SS Trust Fund has no assets other than special purpose IOUs issued by the Treasure Department. So, when the SS Trust Fund wants some cash to pay beneficiaries it hands the Treasury Department one of those special purpose bonds and asks Treasury for cash. And where does Treasury get this cash? It borrows more money!”

    no. you do not understand. read the FAQ I provided. The trust fund is nothing more than a checking account. They put FICA money into it and take FICA money out of it and whatever is left in that account is called the Trust Fund surplus. ALL US Govt Trust funds work this way.

    “Now, in the real world, if you borrow money to get cash to pay off a debt you cancel out. One debt is extinguished with the cash raised by another debt. That’s because you can’t borrow money from yourself in the real world. But what about the federal world?”

    I agree with your assessment of the Federal World but let me ask you a question.

    If you US was not in deficit…what would happen to FICA and the trust fund?

    if you know the answer to that then you know how FICA and the trust fund really works.

    “In the federal world the government can take money from the citizens while promising that the money will be placed in a trust fund to be used to pay out that same money later. Then, the government spends the money it collected on aircraft carriers, Nancy Pelosi’s private jet rides and all sorts of other “goodies” which have nothing to do with retirement benefits.”

    they would spend FICA/SS money on those things if we ran a budget surplus – also. what would you have them do with excess FICA funds if the US was running a surplus instead of a deficit?

    “But the federal government would have to show this debt as a liability on its financial statements, right? I mean the money was taken from citizens with the understanding that it will be used to pay future retirement benefits. And then, the money was immediately spent. So, there’s a liability, right? A liability to the people from whom the government took the money. Right?”

    it’s NOT a pension fund. You just admitted that it’s is a pay-as-you-go system.

    remember there are DOZENS of Trust Funds in the US and all of them work pretty much the same way. These trust funds are temporary holding places for funds collected – like fuel taxes… before they are spend on highways.

    But the fuel tax money gets converted to treasury notes and the money spent on other things and then yes..more debt borrowed to pay it back. In a deficit scenario – ALL the trust funds work this way INCLUDING the trust funds for Medicare Part B and MedicAid ….

    “Only debt held by the public is reported as a liability. Debt held by government accounts is an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements.”.

    Whoa!!

    So, the government took the money from taxpayers saying that it would be placed into a trust fund. Then, they spent the money and wrote themselves IOUs. But, the IOUs are, themselves, assets. So, even though the money is gone, there is no net liability.”

    there are two kinds of debt. the kind that the US owes to public buyers of treasury notes and the kind of debt that the US owes to itself because it borrows from it’s trust funds.

    but the point you miss here is that this has nothing to do with SS as a program.

    you’re citing the way that the US deals with it’s internal finances as “proof” that something is wrong with SS and that’s not true.

    there is nothing more wrong with SS than there is with State pension funds (and corporate) pension funds.

    neither will perform as originally designed without changes and in both cases – higher taxes and/or lower benefits will be the result to keep them in balance.

    Man, you sure can do some cool things when you can borrow from yourself.

    So, LarryG … one more freakin’ time …

    “Where does the Treasury get the cash to redeem the Social Security Trust Fund Bonds?”

    in a deficit condition they do have to borrow it – not only for SS but for ALL trust funds. This is not something inherently wrong with SS as a program. Every trust fund converts cash to treasury notes and later redeems them.

    what would happen with these funds if we did not have a deficit? Guess what – they still get used the same way. the difference is the money gets paid back from other tax revenues rather than borrowing

    “And … if there is no net liability on the government’s books – can redeeming the bonds reduce the liability that doesn’t exist?”

    you’re confusing how the govt operates ALL TRUST FUNDS with a specific problem you think SS has. ALL the trust funds have this same exact “problem” – the fuel tax fund, the Medicare Part B fund, the airport fund, the govt and military retirement trust funds – ALL of them work the same way Ripper.

    Yes, LarryG … these are the people I want managing my retirement finances.

  11. larryg Avatar
    larryg

    re: ” Larry, Larry, Larry… You ask, “What does Obama have to do with Va funding it’s pension plan?”

    Nothing.

    Satisfied?
    ……
    I never, never, never suggested that Obama was in any way coonected to the woes of Virginia’s pension plan. You need to read more carefully.

    Jim… then tell me what the heck this is:

    “First First, they will say the reforms will reduce the state’s competitiveness in hiring

    ” Second, the class warriors will decry the benefit cuts as another attack on the middle class.”

    ” Second, President Obama’s economic policies are killing jobs. Obama inherited a bad situation… and made it worse.”

    so….did you write the second, second or not?

  12. larryg Avatar
    larryg

    DJ/Ripper/Groveton – here’s a link for you :

    Trust Funds and Measures of Federal Debt

Leave a Reply

Read More