Bacon's Rebellion

Democracy Thrives in Sunlight

Virginia Unfunded Liabilities: $5.4 Billion

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by

James A. Bacon
in ,

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

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15 responses to “Virginia Unfunded Liabilities: $5.4 Billion”

  1. Steve Haner Avatar
    Steve Haner

    That first bullet point about assets and bills is interesting, but you really have to look at revenue, too – and the state and local governments collect far more than needed in taxes in a single year to service that debt without having to sell assets. I’m not saying these guys are wrong to point to problems, but are they saying Moody’s and Standard and Poor’s are wrong with their AAA ratings?

    I think the retiree health care promises are indeed the most vulnerable when a crunch does come. But then we’ll have BernieCare.

    1. TooManyTaxes Avatar
      TooManyTaxes

      With any sort of government health coverage for all, we also need a national health service. We cannot expect to operate a private provider system funded virtually 100% by taxes or we will blow through today’s spending levels within 5 years. All docs, nurses, techs, etc. must either be on the government payroll or their compensation fixed at GS levels (maybe SES for docs). Pharma and medical devices must be required to sell their products at the lowest price they sell to any other nation. Highly compensated health care executives need to go.

      1. LarrytheG Avatar
        LarrytheG

        As far as I know – only the UK has actual Govt doctors. All the other OECD countries have private sector doctors – but single payer and/or universal health insurance (which are not necessarily the same).

        Our problem in this country is that we are fee-for-service which means health care providers will pad the bill with whatever services they think they will get reimbursed for. Even Medicare works this way – but Medicare is far more stringent in what it will cover and how much they will reimburse. Medicaid is even more stingy. Ironically, those who oppose single-payer and/or govt controlled cite the much lower reimbursements of Medicare/Medicaid as a “problem”. If more of our reimbursements were like Medicare/Medicaid – our cost would go down substantially and be more like single-payer countries.

  2. LarrytheG Avatar
    LarrytheG

    Steve touched on it. If we total Liabilities – for what time period? Is it more than this year? Same with Revenues. If we book liabilities for the next 20 years and during that 20 years we were going to receive more state and employee contributions each year – as well as investment earnings – then are
    we really calculating “unfunded” in the sense that not only are they unfunded but they won’t be either?

    If you borrowed money on a house to pay back over 30 years – would you book that liability are “unfunded” because you owe it and we can’t say that you WILL PAY it so at this point it is “unfunded”? Does it really mean that even taking into account future employer/employee contributions plus stock market earnings that they’re still “short”?

    We need a better understanding of what exactly “unfunded liability” means because as Steve asked – what does an AAA credit rating mean if we have “unfunded liabilities”?

  3. LarrytheG Avatar
    LarrytheG

    re: health care for govt retirees.

    Called OPEB – ( Other post-employment benefits (OPEB) refers to the benefits, other than pensions, that a state or local government employee receives as part of his or her package of retirement benefits.)

    So in addition to the pension, most localities and State also owe to retirees paid health insurance. I’m not sure if this is booked the same way as pensions but OPEB is a “promise” to continue the employees health insurance into their retirement – for as long as they live.

    I’m not sure VRS handles it but I know that every year in our county – a line item on the county and schools budgets is an amount for OPEB and it grows each year as more retire – however the point has been made that at some point the higher number of retired will start to also die off in numbers… and the costs for those retirees goes away.

    Also worth noting – a pension – unlike a 401K is really an annuity. Once you croak – the annuity stops paying. There are no heirs.

    And the 401K – unlike the pension annuity that pays as long as you live – your 401K might not last as long as you do and I wonder if the concept of “unfunded liability” also applies to folks with personal 401Ks?

    1. TooManyTaxes Avatar
      TooManyTaxes

      Larry, generally most requires the spouse of a pensioner either to accept a survivor’s pension (often 50%) or sign a waiver disclaiming that share. Both the CRS and FERS pension plans have this requirement as a part of the plans. So I don’t think your assumption was correct when you said that defined benefit pension costs go away when the former employee dies if she/he has a surviving spouse. There may be requirements for length of marriage in many of these plans.

  4. LarrytheG Avatar
    LarrytheG

    So… so far, no one has really explained precisely what “unfunded liabilities” actually means…. yet many folks treat the issue as proof the government is irresponsible.

    I think it is more an accounting standard issue than an actual “unfunded” issue. In fact, it’s a bit of a bogus issue if the “unfunded” is counting how much we owe folks with pensions – over their lifetime – but we are only counting how much money is actually in-hand at this point in time.

    Quite obviously if VRS had only enough money in their funds to cover next years pension pay-outs -and were totally dependent on THIS YEARS employer and employee contributions and stock market earnings – we’d have a legitimate crisis. But how many years worth of advanced funding do they actually need to have to be certified as “fully funded”

    If VRS had 5 years of funding this year – sufficient to pay pensions would that be considered “unfunded”? How about they have 5 years of funds AND in the next five years they will collect employer/employee contributions such that at the end of that 5 years -they still have 5 years of reserves? Is that considered “unfunded”?

    Any one of us who would hold a view or opinion on this – needs to have an INFORMED opinion in my opinion. Otherwise we’re just spreading FUD:
    Fear, uncertainty and doubt… chicken little style

    1. James A. Bacon Avatar
      James A. Bacon

      Haha, Larry, you’re the one spreading uncertainty and doubt. At the risk of setting actuaries’ hair on fire, I will attempt one more explanation.

      Teachers and government employees pay into the pension system. Their payments are supplemented by payments by state government, local governments and school systems. In the past, those payments have been more than needed to meet current obligations, allowing the Virginia Retirement to accumulate a big surplus. VRS has invested that money, helping to grow the surplus. However, ongoing employee payments + the surplus + plus the projected income from the surplus (7% a year) will not suffice to pay retirees everything they have been promised. An extra $4 billion or so will have to come from somewhere. That is the unfunded liability.

      To date, the political will has not existed to fully fund that liability. There are too many competing demands for General Fund dollars. Indeed, the General Assembly effectively borrowed from the VRS during the last recession by cutting payments into the system. It has been paying back what it “borrowed.” I’m not sure if all the funds have been restored.

      Having pulled that trick once, you can bet the General Assembly, having failed to build up sufficient cash reserves, will do it again during the next recession.

  5. LarrytheG Avatar
    LarrytheG

    re: ” In the past, those payments have been more than needed to meet current obligations, allowing the Virginia Retirement to accumulate a big surplus. VRS has invested that money, helping to grow the surplus. However, ongoing employee payments + the surplus + plus the projected income from the surplus (7% a year) will not suffice to pay retirees everything they have been promised. ”

    For THIS YEAR – they DO. Every retired person will get EVERY penny they were promised so how can you make that statement?

    As long as VRS has enough money – every year to pay every retiree everthing they are due – what is “unfunded”?

    That’s YOUR FUD – when you say “unfunded” – what exactly is “unfunded”?

    Not this year and not next year – and not the next 5 years… All of that is “fully funded” so exactly what is “unfunded”?

    Truth or FUD?

    1. James A. Bacon Avatar
      James A. Bacon

      Larry, you asked for the definition of “unfunded liability,” and I gave it to you. If you don’t like the definition, take up your argument with the actuarial profession!

      1. LarrytheG Avatar
        LarrytheG

        It’s NOT that I don’t like it! It’s that I do not understand what it means and I’m suspecting I’m not the only one.

        It TRULY IS FUD if no one can actually give the specifics of what unfunded liability means!

        Yes – it IS an “actuarial” standard created by the actuarial profession but do any of us really understand what “unfunded” really means if every year VRS pays out every penny that has been promised and has never missed a payment and Virginia has an AAA rating? Do we really understand the meaning of “unfunded”?

  6. Izzo Avatar
    Izzo

    Larry, this report from SSA covers all the definitions. The one difference is they use the term obligation rather than liability because there is no legal liability, unlike with many pensions. Numbers are in Trillions.

    https://www.ssa.gov/oact/NOTES/ran1/an2018-1.pdf

    1. LarrytheG Avatar
      LarrytheG

      Thanks Izzo! I’ve not seen that particular document and even though it’s only seven pages it has a lot of terms and phrases that are new to many who will not well understand – however – it does add to a better understanding if one plows through it.

      While it IS true the difference between “obligation” and “liability” – are the financial/actuarial concepts behind both SS and other govt-based pensions probably similar?

      ” We use the term obligation instead of the term liability because liability generally indicates a legal contractual obligation. No legal contractual obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, total benefits paid cannot exceed income received. ”

      So this actually DISPROVES the oft-repeated claim that Social Security affects our deficit and basically PROVES that Social Security will NEVER go “broke” as long as FICA Taxes continue to be collected.

      But that’s sliding off the original question about VRS and it’s “unfunded liabilities” and what that actually means (or not).

      So what actually IS the VRS “liability” if they can and do pay out every penny every year to every retiree? Are they supposed to be able to do that for more than one year and the “liability” is the number of years in the future than they have funding in hand right now for?

      Social Security looks ahead 75 years but there is no “fund” – it’s purely a “pay as you go” scheme with the trust fund that was originally created from excess FICA taxes, being used to supplement existing pay-outs to maintain the full amount “scheduled”

      And we know from the 75-year look ahead that they will not be (without changes) because of things like people living longer than originally planned for, higher claims for disability, etc.

      So – Social Security’s “unfunded obligation” is real – there actually will be reduced payouts once the trust fund is exhausted if Congress has not acted to make adjustments. But SS will never go “broke” as long as workers continue to pay FICA taxes each year and those taxes are then paid out to retired. Without adjustment, the pay-out will be less than originally scheduled.

      However, I strongly suspect that VRS is NOT pay-as-you-go with each year’s pension payouts funded from current year employer/employee contributes plus investment earnings.

      Having said that – I don’t know exactly what VRS “unfunded liabilities” actually are if they are not anticipated shortfalls of payouts – so many years into the future? Is that horizon 5 years, 10 , 20, 75? What is the look-ahead window and is it THAT window that is the actuarial standard used to say if the pension is fully-funded or partially-funded with “unfunded liabilities”?

      So is that the concept?

      If VRS is looking ahead some arbitrary number of years as a benchmark between fully-funded and partially-funded/unfunded liabilities?

      If so, does it REALLY mean that VRS is actually teetering on the edge of financial Armageddon as implied sometimes or are we being subject to Chicken Little rhetoric and miring ourselves in “Armageddon”.

      I’m NOT advocating irresponsible fiscal polices – but I AM ASKING if we actually know what the basis of these things are such that we really do have an intelligent perspective of what it really means when we say “unfunded liabilities”?

      If we think VRS has enough funding right now to fully pay out 20 years of pensions – Should we really think it has a serious problem rather than a potential downstream one if adjustments are not made today or soon?

  7. Virginia Ill Prepared to Weather a Recession | Bearing Drift

    […] recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of […]

  8. Izzo Avatar
    Izzo

    Larry,

    I just passed it along to show how actuaries write about it. The 7 pages is complex enough, but I’m sure the calculations behind it are staggeringly complex.

    Regarding your statement that “this actually DISPROVES the oft-repeated claim that Social Security affects our deficit and basically PROVES that Social Security will NEVER go “broke” as long as FICA Taxes continue to be collected” I do not agree. Actual government publications describe how Social Security GOING FORWARD will impact the deficit because the money borrowed from the trust fund will have to be repayed with interest and that repayment comes from the current budget and current taxpayers.

    The second part of your statement, that it will never go BROKE, may technically be true, because collections from FICA will pay some portion of benefits, but any system where 1) people are not getting the money they expect and need in retirement and 2) many people perceive that they are being forced to pay in more than they would hope to recover in retirement could accurately be characterized in my book as BROKEN. As I have said earlier, if I was designing a system from scratch, at its core would be a system similar to the Singapore system that is not pay-as-you go for retirement savings. Redistribution to help those in need would be separated from that system.

    You will see what the SSA is actually calculating as unfunded obligation is simply projected expenses – projected income over the period in question, given the current calculation of benefits and taxes and interest. This is a difficult, but meaningful calculation, because at its essence it is a serious look at the sustainability of the program.

    You can see this sentence in the document and it is the implications of it that are relevant for where we are now:

    “Under a pay-as-you-go program like the OASDI program, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.”

    For the pay-as-you-go to work where we are now, the current taxpayers must pay their own FICA plus fund plus the additional taxes or additional debt payments to pay the benefits for the retired generation as the system sells its Treasury Bonds. This was not the case for the prior generation.

    I would think similar work has been done on the VRS. With most of these systems, the amount owed is a liability and not an obligation as the SSA describes. I have not looked at it and don’t have time right now. I will say though, that I think Jim’s basic thesis in Boomergeddon is correct. There are many similar programs where 1) the government can and does borrow from the fund for current needs and 2) where politicians need to be responsible to not pass to heavy of a burden to future generations, and unfortunately those in control have not been provident.

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