Richmond, the city of monuments, is now home to another monument. But unfortunately, this is a “monument to deferred maintenance” called the Virginia Retirement System (VRS). This monument sits in a deep hole called an “underfunded liability,” which amounts to $17.6 billion — a liability of about $2,235 for each Virginia citizen. Until recently, our reaction to this hole was to assume that if we look the other way long enough, something may happen to make it go away. Unfortunately, the recent recession has made it clear that it is not going away, and we must begin to act responsibly if we are to continue to fulfill the obligations that we have made to state and local employees.
As a CPA who advises clients on retirement issues, I have often been asked by clients who are state employees if they should be concerned about the future of their VRS pensions. I repeatedly advise that one day the Commonwealth of Virginia will have to address the financial stability of the VRS to ensure its future. I also assure them not to worry too much because their plan is ultimately backed by the taxpayers of this state. This backing, however, falls on the shoulders of every Virginian, many of whom do not have any kind of retirement plan, so shoring up the system will be a bitter pill for everyone.
Recessions teach us all very important lessons about excesses and underfunding. The recession severely affected most markets and “when the tide went out,” as Warren Buffett said, “it was easy to see those who were swimming naked.” It is now time for our state leaders to show that they have the courage to make the wise but painful decisions that will be in everyone’s best interest. Gov. Bob McDonnell’s proposal to increase the employer contribution an additional 2 percent and require state employees to contribute 5 percent to their own retirement makes sense. This is a common scenario in most states in this country. The federal government changed its system in the 1980s, and the private sector has been doing this for years. (Although it will mean state workers will now have to contribute to the plan; the initial sting will be softened by a one-time pay increase of 3 percent.)
Individuals had to make very tough decisions during this recession when faced with immediate cuts in pay or job loss. At the same time, companies had to make very tough decisions to stay in business. The last leg in an economic recovery is when the federal and state governments make the tough choices that individuals and companies have already made.
True leadership is evident when you have the courage to make the unpopular and painful decisions needed to resolve a difficult situation. I think we should applaud McDonnell for having the courage to propose changes to the VRS that will move it in the direction of greater solvency. The recession of 2008 was a “game changer,” and it is no longer possible to avoid the financial calamity that will ensue to the VRS if this underfunding is not addressed.
The benefits of this change will be a more properly funded retirement system for our valued state employees, who deserve to know that they can count on their retirement income. As a CPA, I strongly believe in financial responsibility. I often help clients with tough tax and financial problems make the difficult decisions needed to ensure the long-term viability of their limited financial resources. Over the years, Virginia has won many awards for good fiscal policy. I now encourage the commonwealth to make the difficult decisions that are needed to support the continued viability of the VRS. It’s time we stopped digging that hole.
Jim Shepherd, CPA, is co-founder of Kuehl Shepherd Kozlowski & Associates Inc., a fee-only financial planning firm in Richmond.Tweet