Liz Farmer is a GOVERNING finance writer.
E-mail: lfarmer@governing.comTwitter: @LizFarmerTweets
Some Virginia leaders are pushing to enroll new state employees to a 401k-style retirement plan as that state’s pension costs have soared and the pension’s funding has decreased.
The Washington Examiner reports that Virginia House of Delegates Speaker Bill Howell, a Republican, is arguing that the bulk of state employees’ pensions should come from stock market investments, not as a defined benefit. The push comes just one year after Virginia passed reform that now requires state employees to contribute 1 percent of their salary into a 401k plan and 4 percent into the Virginia Retirement System.
But Howell told the Examiner that kind of reform is “nibbling around the edges,” and the percentages should be reversed. “Very few private-sector companies have a defined-benefit plan anymore,” he said.
Virginia’s pension system was fully funded a decade ago and is now just 65 percent funded, according to the Examiner. A pension plan at or above 80 percent funded is considered to stable. Many states last year passed reforms similar to Virginia’s that sought to adjust the way current plans are structured as a way to save money down the road. But most have done that as plans reached the point where they are dangerously underfunded. In 2011, 12 states’ plans were below 60 percent funded.
The low funding levels not only create burdens on state budgets, they can have a poor effect on a state’s credit rating. Last week, Fitch Ratings put Illinois’ general obligation bonds on a negative watch specifically because that state had failed to pass pension reform last year. The state’s pension is just 40 percent funded, according to Fitch.
The watch prompted Illinois State Treasurer Dan Rutherford to warn that the next step could be to down grade Illinois bonds’ A rating. Rutherford estimated in a news release sent Sunday that the failure to address the state’s pension liability is costing Illinois at least $17 million per day.
“It is beyond irresponsible to let this continue,” Rutherford said. “The state needs to reign in the pension escalation and not use long-term borrowing as a ‘solution’ to this problem.”
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