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McDonnell proposes more VRS reforms, state workers to contribute more

State employees would pay more for their retirement, and have an option to move to a 401K-like system, under new reforms announced today by Gov. Bob McDonnell.

He wants to raise the amount of employee contributions, from 5 percent to 6 percent, and restrict cost-of-living increases for retired state workers, along with other changes. Altogether, McDonnell predicts his reforms will bring about $160 million more a year into the retirement system. Current teachers, judges and local employees are not included in those who would pay more in contributions.

Last month McDonnell announced that state and local governments would invest more than $2.2 billion in the Virginia Retirement System, but warned employees that more reforms were coming.

A Joint Legislative Audit and Review Commission report in December showed a widening gap between the amount of money VRS has, and the amount of it would need to cover all current state workers.

Between 2009 and 2011, that gap grew almost 70 percent, from $11.8 billion to $19.9 billion. The VRS system lost money during the economic recession, and while it has billions of dollars in its trust fund, experts say its “funded status”–the amount of money in the fund as a percentage of the amount of money it would take to cover all of the fund’s obligations–has dropped below the 80 percent level with which experts are comfortable.

As of June, that funding status was 70 percent for state workers and 66 percent for teachers, and JLARC predicts those numbers could drop to 63 percent and 61 percent by next year.

McDonnell says that means reforms are necessary to preserve the retirement system for future retirees.

“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 said in a release announcing his reform plans. “We must act today to ensure our state employees retirement accounts are there for them, in full, tomorrow.”

McDonnell’s bill makes several changes to benefits. It reduces a multiplier (from 1.7 to 1.6) for new hires (after Jan. 1, 2013) except judges and public safety employees. It also caps the cost-of-living-adjustment at 3 percent for all beneficiaries, except those who will be eligible for full retirement within five years of next Jan. 1. It also includes a provision that says only those employees who have reached the age for unreduced retirement benefits will get the cost-of-living-adjustment.

His bill also changes the calculation for average final compensation for all beneficiaries, from a 36-month average to a 60-month average.

And it would phase in the increase in employee contributions from 5 percent to 6 percent, at a half-percent a year. Unlike last year, when the state required state workers to pay their own 5 percent contribution but offered a pay raise to partially compensate, there is no pay raise tied to this increase. The increase applies to general state workers and state law enforcement, but not to judges, teachers, or other local employees.

In addition to the bill changing retirement benefits, McDonnell has also proposed a bill to create an “optional hybrid plan,” in which state workers could choose to stay with the current pension plan or move to a new defined-contribution plan, which would work more like a 401K.

A JLARC study showed that moving the state’s pension system entirely to a defined-contribution plan could be costly because the state would have to pay off all the VRS liabilities. A hybrid plan avoids those costs while setting up an alternative retirement plan that costs the state less money than its pension system.

McDonnell wrote that his bill would bring $160 million to $170 million more a year into VRS. Over 20 years, he said, the system would get $3.6 billion more through contributions and cost savings.

The bills are being sponsored by House Speaker Bill Howell, R-Stafford.

Howell said a hybrid plan is “a good compromise” between a pension and a 401K. He also said the increase in employee contributions is not large.

“I don’t think it’s unreasonable to ask for an additional 1 percent,” he said.

Howell said he has been interested in VRS reform for a while, and believes it’s time for the state to take a look at how it offers retirement benefits.