Older State Employees Hesitant About Pension Reform

By Bill McMorris, Virginia Statehouse News Wednesday, December 14, 2011

ALEXANDRIA - Geoff Borah isn't looking to get rich from his state pension.

He's just looking for stability and, like many older workers, he is keeping an eagle eye on the retirement debate coming up in Richmond.

He joined the Alexandria Redevelopment and Housing Authority, or ARHA, a public agency that works on affordable housing, as a carpenter in September 2008.

The burly 52-year-old found that stability in Virginia's defined-benefit pension, a system in which the state pays workers through retirement based upon years of service and final average salary.

"I was about to get married, so I was looking for security," he said.

Security was hard to come by that month, as the stock market, as well as the real estate and construction markets Borah had been a part of for nearly 30 years, began to shutter and ultimately crashed.

The Great Recession laid bare the risky world of credit default swaps and derivatives, and it brought the Virginia Retirement System, or VRS, with it. The state's retirement coffers bled value to the tune of $15.1 billion between fiscal 2007 and 2009, 25 percent of its value.

The state relies on those investment dollars for 66 percent of pension payouts. Ever since the cash cow was called into question, lawmakers have been looking for ways to cut costs, including a push to chip away at the defined-benefit system with a defined-contribution system in which the state puts money into an investment account that employees would manage, much like a 401(k).

It is an unwelcome development for Borah.

"I would rather go with the defined-benefit system," Borah said. "That's your safety net right there, isn't that the point? It's guaranteed."

The guaranteed aspect of the plan has left budget hawks equally nervous.

State Sen. John Watkins, R-Powhatan, said the old social contract needs to be revisited or taxpayers could be left holding the bag.

"We learned a lesson during this recession. The state cannot assume all of the risk for pension plans," Watkins said. "I think we have to face the fact that employees are going to have to be a part of funding this balance."

Estimates vary as to what the state owes its 600,000 workers and retirees. The state estimates that the pension fund is $19.9 billion short, while some economists place that debt as high as $50 billion.

That debt will have to come from taxpayer dollars and contributions from state workers, unless employees assume the risks inherent in the stock market. That prospect has left more experienced workers uneasy, according to a report by the Joint Legislative Audit and Review Commission, or JLARC, a bipartisan General Assembly study group. Read an earlier story about the JLARC study here.

JLARC's survey of 5,000 state workers found that 78 percent of workers with more than five years' experience would probably or definitely opt for a defined-benefit plan over a defined-contribution plan.

"If they think I'm going for that, they're crazy," Borah said.

But Watkins, who sponsored Republican Gov. Bob McDonnell's failed push for an optional 401(k)-style system in earlier this year, said such a system is designed to appeal to a different set of workers.

"We have to get rid of this assumption that people looking for government work are going to stay in the job forever," he said. "Young people are looking for mobility and the ability to move around, that's who the defined-contribution system is for."

The JLARC survey seemed to confirm this suspicion. Nearly 45 percent of those with less experience said they'd be willing to go for a 401(k) system and 57 percent said they'd consider switching to a "hybrid plan" that allows employees to shift 4 percent of their salary into a defined-benefit plan and 1 percent into a defined-contribution plan.

Watkins said the evident popularity of the hybrid plan, as well as the $220 million JLARC estimates it would save during the next 10 years, will play a part in the pension reform proposals he's looking to craft for the 2012 session, which begins Jan. 11.

"The idea of the hybrid plan makes a lot of sense to me; it's going to save money," Watkins said.

The plan also would give employees enough money to retire if combined with Social Security payouts, according to the report.

Borah, along with 69 percent of more experienced workers who oppose the hybrid plan, is still skeptical.

"I feel like someone's going to get caught out on the loop if we stop paying into" the defined-benefit system, he said.

Some lawmakers on the 15-member JLARC panel also are worried that employees may be hurt by the individual investment aspects of the plan.

"My concern is that many employees would not be sophisticated investors," said Delegate Harvey Morgan, R-Gloucester. "Without access to (investment) advice, it could be a disaster."

Borah said he doesn't follow the stock market. He said he thinks he'd have a better shot at winning the lottery. He does, however, pay attention to politics, he said.

And even with his third anniversary coming up next week, Borah said he'll be thumbing through the papers after McDonnell presents his budget address on Monday — and looking for the word pension.