by James A. Bacon

The Virginia Retirement System (VRS) has awarded $6 million in incentive pay to its internal investment team, raising the issue of whether the Commonwealth of Virginia is creating a caste system of “haves” and “have nots” in its workforce.

The VRS Board of Trustees approved the incentives yesterday, reports the Richmond Times-Dispatch, even though the VRS portfolio generated a return on investment of only 1.9% in fiscal 2016, far short of the 7% long-term goal. The bonus was justified, VRS officials contended, because the pension fund’s internal investment team out-performed the 1.3% return of its benchmark.

As Chief Investment Officer Ronald D. Schmitz explained, the internal team has generated an average of $289 million a year over the benchmark over the past decade, while also saving $26 million in fees to Wall Street investment managers. “A $6 million bonus versus a $300 million gain seems like a pretty fair gain to me.”

However, as the T-D’s Michael Martz observes:

The timing of the investment awards also is awkward, as the state grapples with a projected $1.48 billion revenue shortfall that already has wiped out scheduled raises for state employees, college faculty and school teachers, and state-supported local employees, including sheriff’s deputies.

“State agencies and institutions that charge tuition, sell lottery tickets, license businesses and manage employee pension plans are free to use those funds to give employee pay raises,” said R. Ronald Jordan, executive director of the Virginia Governmental Employees Association. …

“Treating employees based on agency revenue source has resulted in tremendous pay disparity and a system of agency “haves” and “have nots.”

Bacon’s bottom line:

Jordan has a point, and it’s understandable why state employees would be demoralized. But what’s the solution? Should we stop rewarding VRS investment professionals for superior performance, a standard practice in the financial services industry? If the internal team can save tens of millions of dollars, doesn’t everyone come out ahead? The alternatives — letting top performers get snatched up by the competition, or settling for sub-par performance by highly paid Wall Street money managers — will only increase the financial stress on the Commonwealth and make it more difficult to raise employee salaries in the future.

I made a similar argument yesterday: Paying top dollar to hire top talent to run the state’s IT services will lead to better decisions that save the state money. State government needs to reward the people in critical functions who do superior work. The alternative is to be “fair” but broke.