It was certainly great news to end Virginia’s fiscal year on June 30 with an approximate $403 million surplus. When I was sworn in as the new delegate for Hanover County’s 55th House District on Jan. 13, the Commonwealth was facing a $1.8 billion deficit for the 2010 fiscal year. 

The Virginia House and Senate had to make some tough choices, something the federal government has been either unwilling or unable to do;  but in the end I believe we acted in the best interest of the citizens of Virginia by balancing our budget without placing an additional tax burden on the people. 

Critics of the state budget have implied that Gov. McDonnell and the Virginia General Assembly achieved the budget surplus by taking money from the Virginia Retirement System. That implication is simply not true.

The VRS is too important to our state and local employees for me to allow that assertion to go unchallenged.

Additionally, Virginia citizens deserve to know that their state representatives have not “robbed Peter, to pay Paul.” That is not the way Virginia operates.

It is important to understand that 2010 legislative actions related to the VRS were part of a comprehensive reform of VRS benefits. 

First, it is important to understand that these changes do not affect current employees hired prior to July 1, 2010.

House Bill 1189 fully recognized and addressed the need to “bend down the cost curve” of the Commonwealth’s VRS pension liabilities, which will help bring the state budget into more structural long-term balance going forward. 

The changes enacted by HB1189 will reduce the cost of providing benefits to new hires by 15 percent to 20 percent as compared to benefits currently provided to existing employees, and make Virginia’s public employee benefits more comparable with the private sector. These reforms are expected to reduce the employer costs by as much as $3.0 billion over the next 10 years, with even greater savings over time.

While this fiscally responsible change will lead to lower contribution rates in the future, it is important to understand what really drives the funding status, and the contribution rate for VRS. 

When rates are set by the actuary, they consist of two components.

The first component is called the “normal” rate, which is the rate needed to pay for the benefits for each government employee.The normal rate is around seven percent of payroll. 

The second component of the rate is the “unfunded liability,” which fluctuates every two years, and is primarily driven by market conditions or in other words, the value of the VRS assets.

When the VRS rates for the FY 2010-2012 state budget were set by the actuary in June 2009 (a full year before the start of the new budget), the VRS asset value was approximately $42 billion. 

At the close of the fiscal year on June 30, 2010, the VRS assets increased in value by 15% to about $48 billion. 

Therefore, the unfunded liability of the VRS is less today than when the rates where set in June 2009!

In other words, the contribution rate attributable to the unfunded liability would be less, based on the June 30, 2010, valuation. 

As such, when given the choice on what rates should be funded, the 2010 General Assembly and governor decided to fully fund the “normal” rate only, since the rate attributable to the unfunded liability is somewhat self-correcting with the current and improving markets.

Likewise, HB 1189 over the long-term will lower the unfunded liabilities of the system as well.

In closing, I want to emphasize that this action was not taken lightly but only after careful examination did the General Assembly and governor conclude that it was necessary. 

The General Assembly sought to make several difficult choices that would minimize reductions to our core functions of government: public education, public safety and health care. 
Of course service reductions in these areas were not spared the budget axe. 

The fact remains, however, that the Virginia General Assembly and governor (unlike other states) have addressed its long-term pension liabilities through comprehensive reform, and as a result has strengthened the entire government retirement system.