VEA Keeps You Informed

VEA has launched a blog that will address important General Assembly legislative issues.

Hot off the press is VEA's Rob Jones' first look at the various bills that, if passed, will drastically reshape VRS for educators. The legislative attack on VRS is serious and should be of great concern to all educators who plan to make education their life's profession.

Check out VEA's legislative blog at

VEA Daily Reports
http://veadailyreports.blogspot.com/

Cash Cow

http://www.gomarketingmaven.com/products/images/cash-cow.jpg

Cash Cow

Rob Jones, VEA's Government relations director, sent an email out today calling attention to a dire threat facing every one of Virginia's educators during the next General Assembly session.

In the General Assembly session ahead, one thing we can count on is that the benefits offered by the Virginia Retirement System will be under attack. In these tough times, legislators will be looking under every rock to find ways to cut costs.

Thanks to a Joint Legislative Audit and Review Commission(JLARC) report released a year ago, seven proposals are up for consideration, including eliminating the current traditional pension plan and replacing it with a 401(k) personal risk account.

According to Rob, many of our members simply do not understand the true benefit and promise of our current system. Why? Perhaps they haven't experienced the real ebb and flow of investment life. More likely, they have never invested at all.

Do you realize that before Roanoke County Schools revamped our 403-b investment program last year, about 18% of our employees took advantage of the program? When we switched over to the Hartford management team after an intense selection process necessitated by IRS tax law changes, participation has dropped to 9.6%. Folks, the industry average for 401-k (similar to 403-b) participation in the business world is 79%. Given time and a strong effort by our Hartford representatives, Kyle Scully and Rob Mangano, this percentage should slowly grow back.

As a career educator, I fully understand why it’s easy to let retirement thoughts slide. We face so much in our daily PRESENT lives serving others that it's hard to carve out time to think about our own futures.

My wife and I are that unique educator couple. We both teach elementary school and have been investing in 403-b's since the mid-1980's. We began investing simply because we wanted a full retirement option when we decided that teaching was over for us. We wanted the ability to live comfortably and maybe travel a bit.

We were confident to develop an investment plan because we knew that we had two components in place already, the defined benefits offered by Social Security and VRS. With that security in mind, we scrimped and saved pennies from our meager salaries (I started at $10,500 a year) and strode out into the investment world. We developed a relationship with a financial planner in whom we have grown to trust implicitly. We knew that, between VRS and Social Security, we could expect a constant sum of money that would allow us to live. Our 403-b’s would just be icing on the cake and allow us to experience life.

Like many others, the 403-b dream has been mixed. We’ve invested faithfully for over 20 years in solid funds but the inherent risky nature of the product doomed us in the down times. The technology bubble burst bashed our accounts and the recent crash sank us.

Here’s what I’m getting at. We knew the risks and were willing to take them because we had security in our hip pocket. Now, some legislators want to take my security away. They want to turn my DEFINED BENEFIT RETIREMENT PLAN into a PERSONAL RISK ACCOUNT.

On top of switching VRS from a defined benefit plan to a personal risk account, the General Assembly is eyeing the giant pile of money being held by VRS in our name. They covet these billions. Even though these billions were earned by us and were kept in guarded trust for us, sometimes in lieu of salary increases, this money is a very tempting pot of gold that could cure the state of what ails it in the short-term, so they believe.

According to Rob’s analysis of JLARC’s report, a retiring teacher can expect a 48% REDUCTION in benefits from VRS. 48% . I’m trying hard to understand why someone could possibly think that idea is acceptable or advised. Perhaps such people are taking advantage of Math SOL 4.5 (Front End Estimation). 48% written as a decimal would be 0.48. Using the front-end method, underline the front digit and drop the rest 0.48. Hence 0.48 can accurately be estimated as 0 or 0% using front-end estimation. Of course, most of the rest of us would simply round off 48 to 50 and advertise the 50% reduction in benefits (Also Math SOL 4.5).

That’s right, there are people who don’t care and may even be blind to the fact that educators will endure a 50% cut in benefits if we go to Personal Risk Accounts. I fully expect Rob to share more information in the coming weeks of how exactly these accounts will impact us.

We need to educate our colleagues about both the benefits of the current system, which provides a guaranteed benefit for life following retirement, and the shortcomings of the 401(k). The current issue of Time magazine includes an excellent article entitled, "Why It's Time to Retire the 401(k)."

http://www.time.com/time/business/article/0,8599,1929119,00.html

Please read this article and share it with friends.

Our current pension system is worth fighting for.

What Rob said. Some things you just have to fight for. But, hey, maybe you think we should all just be thankful to have a job.

VRS in a Lurch

Robert T. Schultze is the director of the 24th largest public or private pension system in the United States, the Virginia Retirement System (VRS). On Monday, he and his staff reported to the Virginia General Assembly's Joint Legislative Audit and Review Commission (JLARC) that VRS assets have lost about 21% over the first half of this year. You can read more about the Monday meeting from several media sources: Richmond Times, Forbes, Washington Examiner.

According to Charles Grant, CIO of VRS, the teacher fund has dropped to 69.9% funding level. Whenever a fund drops below 70% funding, red flags begin to fly. Grant went on to predict that he expects the fund to drop to a 60.3% level by 2013.


Robley Jones, who heads the Virginia Education Association Government Relations office, has another perspective on the current VRS dilemma. While the media covering the VRS retreat have characterized it strictly as a market loss scenario, Jones points out that it's much more than that.

On December 17, 2007 the Pew Center of the States released a study about state pension systems entitled "Promises with a Price." The Virginia fact sheet released with that report stated that "...Virginia's funds aren't in as healthy shape as they used to be, and the state has stumbled a bit in making its full annual contributions toward its long term obligation. The funding ratio of Virginia's pension plans dropped fairly substantially between 2001 and 2005, and in the last 10 years, the Commonwealth has frequently made less than the annual required contribution, as set by its own actuaries."

You combine this historical underfunding of the VRS system with the 2008 market meltdown, and you find yourself in the mess we are in today.

Last October, VRS advised JLARC of six actions that could be taken to help bolster VRS. Monday, the six options were brought up again at the meeting. Without a doubt, implementing all of some of these options would radically redraw the VRS upon which teachers have come to rely. VEA GR summarized the six options and added brief comments.

1 - Impose an additional 2% employee contribution. This would be in addition to the 5% employee contribution now paid by your employee who also pays the employer contribution. This 2% might be phased-in .5% at a time in years when raises are granted.

2- Increase the minimum retirement age for non-vested and new hires from 50 to age 60. Note: One becomes vested in VRS after five years of service.

3 - Change the Cost of Living Adjustment (COLA) on retirement benefits by capping the increase at 4% a year rather than the current 5%. FYI - if, for purposes of illustration, you retroactively applied this change in the COLA to one who retired in 1978, the reduction in benefit would be 6% over the first 10 years and 12% after 30 years in retirement.

4 - For new hires and non-vested employees combine a defined benefit (DB) and defined contribution (DC) plans. The DB plan would have a lesser benefit than the current VRS benefit. Employees would contribute to both. The COLA would only be included in the DB plan. This plan would provide 85% of the benefit in the current plan.

5 - Require a Cash Balance Retirement Plan for new hires and non-vested employees. This is like a traditional defined contribution plan, except for the fact that a 5% return is guaranteed. Employees contribute with an employee match that increases with years of experience. There is no COLA on benefits. Entire balance can be withdrawn when separating from service.

6 - Require a Defined Contribution Plan for new hires and non-vested employees. The matching contribution from the employer would increase with years of service. No COLA would be provided and the entire balance could be withdrawn when separating from service. Only two states now have this. The plan would provide 52% of the benefit value of the current VRS plan.

Politically speaking, this is the second time that VRS officials have reported to JLARC in the past nine months. Both times, VRS officials have raised the six options in the minds of the audit and review body. If this battle were a bike race, this tactic would be known as positioning the rider for the sprint to come. From the perspective of a public employee, Rob Jones says it best, "The recession is only part of the reason for the current VRS shortfall. The failure of the General Assembly to honor the VRS actuary's recommendations plays as large". [emphasis added] Without a doubt, the battle for VRS is positioned to be a main topic of discussion during the upcoming General Assembly session.

JLARC Report on VRS

Rob Jones from VEA heard a recent JLARC presentation on VRS and its future. I'm copying the exact email Rob sent out in the hopes that you will have accurate, concise information. Keep in mind that JLARC is an audit and review committee. They do NOT create policy. However, they are listened to and respected in the General Assembly.

October 14, 2008

The Joint Legislative Audit and Review Commission presented their report entitled "Options for Total Compensation" on October 14th. The commission staff was doing what was asked of them, and we should not kill the messengers, but it is what we feared.

Before I summarize the implications of the report for school board employees, let me first expose a major flaw in the report when it is viewed from the public education perspective. For the state employees, the options were developed in the context of their total compensation package (salary, leave policies and health benefits). This was not true for school board employees. I thank Senator Edd Houck for pointing this fact out to his fellow commissioners.

The options contain new target salary goals for state workers, and leave purchase plans. In short, for state workers, there is sugar with the medicine. School board employees only get the medicine.

I'll try to summarize the options which will affect school board employees/VEA members.

First, it is important to understand that none of these options will affect folks who are already retired. The recommendations related to VRS are labeled "R" for retirement.

R1 - Impose an additional 2% employee contribution. This would be in addition to the 5% employee contribution now paid by your employee who also pays the employer contribution. This 2% might be phased-in .5% at a time in years when raises are granted.

R2 - Change the Cost of Living Adjustment (COLA) on retirement benefits by capping the increase at 4% a year rather than the current 5%. FYI - if, for purposes of illustration, you retroactively applied this change in the COLA to one who retired in 1978, the reduction in benefit would be 6% over the first 10 years and 12% after 30 years in retirement.

R3 - Increase the minimum retirement age for non-vested and new hires from 50 to age 60. Note: One becomes vested in VRS after five years of service.

R4 - For new and non-vested employees replace the Retiree Health Insurance Credit with Integral Part Trust (IPT) Accounts.

R5 - For new hires and non-vested employees combine a defined benefit (DB) and defined contribution (DC) plans. The DB plan would have a lesser benefit than the current VRS benefit. Employees would contribute to both. The COLA would only be included in the DB plan. This plan would provide 85% of the benefit in the current plan.

R6 - Require a Cash Balance Retirement Plan for new hires and non-vested employees. This is like a traditional defined contribution plan, except for the fact that a 5% return is guaranteed. Employees contribute with an employee match that increases with years of experience. There is no COLA on benefits. Entire balance can be withdrawn when separating from service.

R7 - Require a Defined Contribution Plan for new hires and non-vested employees. The matching contribution from the employer would increase with years of service. No COLA would be provided and the entire balance could be withdrawn when separating from service. Only two states now have this. The plan would provide 52% of the benefit value of the current VRS plan.

These options are not consistent with VEA's positions. As we await specific legislative proposals we will need your help with educating your colleagues regarding what looks like a battle ahead.

I have done my best to offer a concise and factual summary of the options that will affect school board employees. Additional information will follow.

Thank you,

Robley Jones

VEA GR