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Posted June 17, 2012 | Leave a comment
Localities, schools to pay workers' retirement
By Alex Bridges -- firstname.lastname@example.org
Local government and school workers across the state start paying more toward their retirement next month.
But employers under the state mandate also kick in with a comparable amount to "make them whole" and, in some cases, went the extra step to give workers a small pay raise. So workers participating in the Virginia Retirement System may see bigger paychecks but also a larger chunk taken out for their retirement.
The mandate goes into effect July 1 and, depending on the locality or the school system, an employee may start paying from 1 percent to 5 percent of his or her salary into the VRS. But because any rise in salary would cause an increase in FICA taxes, most localities and schools had to budget funds to cover that added cost or else workers actually would see a decrease in pay.
The General Assembly gave localities a choice -- to require all workers put 5 percent of their salary into the VRS and then increase pay by the same amount or spread the retirement contribution requirement over a period of up to five years. Counties in the region and their school systems chose to require workers pay the entire 5 percent while some towns set the rate at 1 percent for the first year.
Some smaller towns may have fared better under the mandate.
Edinburg Mayor Daniel Harshman described the arrangement as "taking money out of one pocket and putting it in another." Edinburg Town Council chose the 5-percent rate. As Harshman explained the town had budgeted the money in its general fund but now moved the money to the VRS category.
"Where it really gets to be a big expense is when you start looking into a school board, a lot of employees, all the added expenses and they add up really fast when you're looking at big numbers," Harshman said. "In our we only have about nine employees affected by this. It didn't really amount to very much."
By comparison localities and school systems had to budget millions of dollars to cover the cost though they could have opted to spend less in the next fiscal year by choosing to spread out the rate increase. Officials worried that, because new employees hired on or after July would have to pay 5 percent into the VRS, allowing current workers to contribute just 1 percent may seem unfair.
Shenandoah County government and schools opted for 5 percent. The school system allocated $2.98 million in fiscal 2013 to cover both the 5 percent pay raise and a 1.5 percent cost of living increase, according to Jeremy Raley, assistant superintendent for administration and finance. FICA taxes on the raise absorbed 0.7 percent of the cost of living increase but employees paying into the VRS still come out ahead. The cost to the county is $364,507, according to Budget Manager Garland Miller.
Warren County School Board also opted for the 5 percent which will cost the system $302,632, according to Director of Finance Robert Ballentine. Full-time employees also received a 2 percent pay raise above the 5 percent to cover their VRS contribution.
Frederick County School Board chose 5 percent. Steve Edwards, spokesman for the division, explained the schools would have saved money by requiring workers pay five percent into VRS initially because the system already had planned to cover a 4.9 percent contribution. But the school division had to offset the cost to the employee by raising salaries by 6 percent which covers FICA.
The mandate remains a sticking point with local leaders.
In Front Royal, members of town council have heard at least twice from Finance Director Kim Gilkey-Breeden who recounted a meeting with VRS representatives. When asked by local government officials how the state would benefit from the mandate, Gilkey-Breeden has told council VRS representatives could not specifically answer that question.
Virginia faced a $20 billion, unfunded liability with its retirement system, according to Del. C. Todd Gilbert, R-Woodstock. Gilbert noted the deficit would not be reduced "without bold steps."
The steps the general assembly took, however, generated complaints and protest by local governments and elected officials who, over the past several months, said the state put the burden of filling the retirement deficit on local governments and schools.
But Gilbert said legislators should take all the heat for trying to save the VRS from financial collapse. Gilbert noted the general assembly tried to help ease the pain to localities by allowing governments and schools to phase in the 5 percent increase.
"The state and the localities both had been woefully underfunding the retirement system for a long time and we decided to take the kind of bold action that other states have failed to take in the face of the insolvency of their pension system which is to recognize that our retirement system was ultimately destined for bankruptcy and take the necessary steps to prevent that," Gilbert said. "For years both the state and the localities have been kicking the pension can down the road."
In order to prevent the bankruptcy, Gilbert explained, new employees as of 2014, must contribute to their retirement upon hiring. This will result in "substantial, long-term savings" for taxpayers at the local and state levels, according to Gilbert.
"Within just a few years from now, however, the state will be meeting 100 percent of its obligations to VRS," Gilbert added. "Both the state and localities are having to make sacrifices here to shore up our system. But it's not like we just put it on the localities; the state is doing the same thing and ultimately this is a question of making sure that the taxpayers' money is being well-spent and being spent responsibly and we are meeting our obligations to our existing employees."
According to Gilbert, the general assembly changed the VRS's assumed rate of return on its investments, per the agency's recommendation, because the retirement system has seen positive results. Gilbert said this saves localities hundreds of thousands of dollars.
The legislator predicted that, had the state continued on the same path, the VRS no longer would exist for employees.
Gilbert noted that the general assembly a couple of years ago gave counties the option of requiring their new employees to begin contributing 5 percent of their salary to retirement, which would have taken effect July 1, 2010.
"Some counties chose not to take advantage of that cost-savings opportunity," Gilbert said. "I'm sorry if they're now upset that we had to take steps to finally right this ship."
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