Update to Sine Die Newsletter: VRS and Transportation

The General Assembly adjourned, sine die, on March 10, without passing a final budget. The outline of a budget appears to be close, and the General Assembly will reconvene on March 21. I would expect that a budget will be approved shortly thereafter. A couple of important measures dealing with VRS and transportation were passed on the last day of the session, and I wanted to provide some up-to-date information.

One of the big issues this session has been the retirement system. All of the retirement systems, including those for state employees, teachers, local employees, state police and other law enforcement officers, and the judiciary, haveroughly a combined $24 billion unfunded liability. Experts in public pensions suggest that the accounts have to be 80 percent funded in order to be viable over the long haul. Our accounts do not meet this benchmark. This is not a problem that occurred overnight, and we have known for years it needed to be addressed. The quickest way for us to return the VRS to viability is for the General Assembly to fund the various retirement accounts at the level proposed by the VRS Board of Trustees. Historically, the General Assembly and the Governor have reduced the contribution below the suggested amount to fund other priorities. In other words, the contributions have been treated like a credit card.

If the General Assembly began funding the retirement accounts at the VRS Board of Trustees suggested amount this year, we would reduce the unfunded liability to under $18 million in the next decade, and, achieve the 80 percent funding level. This is exactly what Sen. Janet Howell (D-Reston) proposed last year in a constitutional amendment that passed the Senate and died in the House of Delegates. It makes sense for the state to contribute the amount proposed by the Board, which is what we require local governments to do for local employees. However, we would have to shift hundreds of millions of dollars from other core services to VRS or find additional revenue.

On the final day of session, a small group of legislators reached consensus and came out with a compromise proposal. A summary of the changes is available at the Senate Finance Committee's website. For local employees, localities are required to provide a 5 percent pay increase on July 1 of this year. The raise is to offset the new requirement for local employees to contribute 5 percent into retirement, much like we did with state employees last year. In addition, employees will have an option to contribute an additional 1%. If they do, localities will be required to bump their pay up another percent. Localities will still be required to pay a local share at the level suggested by the VRS Board of Trustees.

There are changes with respect to benefits, though there is an argument that the changes are not significant. The multiplier is changed from 1.70 to 1.65 for members with less than five years of service as of January 1, 2013 and benefits are based on the last five years of service rather than the last three years. The bill respecting state employees makes significant changes as well. All new employees will have a hybrid retirement system. Four percent of the employee's contribution goes into a defined benefit plan and 1 percent goes into a defined contribution plan.

I voted against all four conference reports for a number of reasons. I am concerned that we are imposing on local governments a mandate with an unknown cost. I asked pointed questions during the briefing about the effect of the plans on retirement benefits and about the cost to local governments and did not receive answers that quieted my concern. I am also concerned that we are providing a disincentive for people to work in public service. It is important that we not only maintain trust with those people who are already vested in VRS (and these bills do not affect those people who are vested), but that we provide an incentive for highly qualified and talented people to come to work in public service. The bottom line is that there were too many unanswered questions for me on all of these bills. While I am committed as anyone to restoring VRS, the quickest way we can restore the health of the system is to simply pay into the system what the trustees propose. The problems we presently have with respect to the retirement system did not arise because of mistakes by local governments or their employees. They arose because the General Assembly and the Governor, over the last number of years, have chosen to underfund the retirement system. I am convinced that we can find a better way to fix VRS.

One of the other major issues we have continued to ignore in recent years is transportation. Prior to the session, the Governor proposed shifting additional general fund dollars into transportation. His plan for transportation also included a proposal to sell the naming rights of our highways, bridges and tunnels. The House and the Senate came up with different approaches for transportation. And those proposals were reduced to a conference report, representing the compromise between the two sides.

The House agreed primarily with the Governor and also included language that assured the devolution of responsibility to local governments. This constitutes a major change in transportation funding in Virginia. The Senate took a different approach, rejecting the idea that we sell the naming rights of our public infrastructure, and also rejecting the ideas that we shift general fund money from public schools, public health and public safety to transportation. Rather the Senate, in a bipartisan manner, chose to index the gas tax which would have resulted in about two-tenths of a cent increase in the gas tax over the next year. Both the House and the Senate views on raising money for transportation were rejected by the conference report. I voted against the compromise because in the end it only does two things, neither of which I think are good ideas. First, the conference report requires an unprecedented interaction between the localities and the Commonwealth Transportation Board with respect to local highway planning. In my view, this sets the stage for the devolution of funding for highway maintenance to local governments. Few local governments have the ability to raise the money necessary to build or maintain highways. In my view, this is a step toward a balkanized transportation system.

Second, the conference report allows the selling of naming rights for bridge, tunnels and highways, which the Governor's office suggested could potentially generate $100 million a year. I have not seen any evidence to suggest that sort of revenue can be raised by selling the naming rights to our highway infrastructure. Rather I think the idea is demeaning. Traditionally, we have named bridges and tunnels for fallen police officers or Medal of Honor winners or other military heroes. We have named highways after local people or events of significance. In each case, the naming has historical or geographic significance. For these reasons, I voted no. The Lt. Governor served as a tie-breaking vote, so the bill now heads to the Governor for his consideration.

Best,

Creigh

(Electronic mail, March 12, 2012)