Members of the Joint Legislative Audit and Review Commission (JLARC) were briefed by Commission staff on December 14 on the Commission’s annual oversight report on the Virginia Retirement System (VRS). The VRS Oversight Act requires JLARC to oversee VRS on a continuing basis, report on investments and other topics, conduct actuarial analysis every four years, and publish a guide for state legislators. The continued health and well-being of VRS is important to local governments as it administers retirement programs and other benefit programs for state and local government employees, including teachers. VRS receives funds from employer contributions, employee contributions, and investment income.
As of September 30, VRS had $85.1 billion in assets, a $2.4 billion increase over a one-year period. Ranked by value of assets, VRS is the nation’s 18th largest public or private pension fund. In FY 2020, VRS paid $5.3 billion in retirement benefits and $430 million in other post-employment benefits from the trust fund. However, in FY 2020, VRS benefits paid out and expenses exceeded additions to the trust fund by approximately $300 million, mainly due to investment incomes underperforming investment benchmarks and accounting for less than one-third of total additions to the trust fund, after employer and member contributions.
Employer contributions, paid by the state and local political subdivisions through contribution rates, are one of the main sources of funding for VRS retirement plans. Every two years, the VRS board certifies the employer contribution rates that are needed to pay and fully fund the plans over time, as determined and recommended by its actuary. For the 596 local plans that are not supported by the state, the Code of Virginia requires employers to pay the rates certified by the VRS board, with some limited exceptions. Last year, the employer contribution rates for the teachers plan and the local plan average increased by 0.94% and 0.73% respectively for the FY 2021 – FY 2022 biennium. As previously reported, this is largely due to the VRS Board assuming a lower assumed rate of return for the asset portfolio. The VRS actuary projected that contribution rates for teachers and state employees will remain close to their current levels over the next 10 years, assuming investments meet the assumed 6.75 percent rate of return. This information will hopefully remain consistent as we approach a rate-setting year.
Employer contribution rates are one of primary means of ensuring that the funded status of VRS plans remains healthy and able to cover long-term liabilities. According to JLARC, in FY 2020, the funded status of the teachers plan remained approximately the same despite relatively lower investment returns for two primary reasons. First, investment returns are phased in over five years when calculating the actuarial value of assets, which minimizes the impact of returns in any given year. Second, the plans experienced lower than anticipated increases in payroll and inflationary adjustments to benefits.
Under Governor Northam’s recently proposed amendments to the 2020-2022 biennial budget, unfunded liabilities in the VRS teacher retirement plan would be reduced by directing a deposit of an estimated $61.3 million GF in FY 2021 to expedite repayment of state contributions that were deferred during the 2010-2012 biennium. This would accelerate repayment of that deferment one year ahead of schedule and hopefully help reduce the need for higher employer contribution rates from both the state and local governments.
Regarding local government plans, according to JLARC the average funded status of local plans, adjusted to account for size differences across plans, remained at approximately 90 percent from FY19 to FY20. Local plans have maintained a higher average funded status than the teachers plan or the state supported plans mainly because local employers have generally been required to fully fund their plan contribution rates. However, the funded status of any individual local plan may be higher or lower than the group average.
The full report is available here. JLARC’s staff presentation may be found at here.
VACo Contact: Jeremy R. Bennett