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Who will pay?

Cities and counties object to legislation raising their employees’ pay to strengthen retirement system

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Print this page by Tim Loughran

Business owners and other local taxpayers may ultimately have to foot a large chunk of costs resulting from pay raises lawmakers ordered to bolster the finances of the Virginia Retirement System (VRS). 

Under terms of legislation passed on March 12, the last day of the last regular General Assembly session, local governments and school boards were ordered to begin raising the pay of their employees by 5 percent so these employees, in turn, can pay 5 percent of their salaries toward their VRS retirement benefits.

The long-delayed state budget passed by the General Assembly on April 18 included $110 million to help local school boards pay for higher rates for teacher pensions. There was not a similar appropriation for local government employees.

Local governments argue the pay raises will result in increased costs, such as higher federal taxes paid on increased salaries, without alleviating underfunding for state pension programs.

Like localities in most states around the nation, Virginia towns, cities and counties use a combination of residential and commercial real estate taxes along with sales taxes, usage fees and permit income to pay for public schools, local law enforcement, fire protection, garbage collection, water and sewers, road repairs and other municipal services.

And when unfunded mandates like the one designed to bolster the VRS are approved by lawmakers in Richmond, local residents and businesses in every corner of the state are usually asked to pay for it, says George C. Peyton, vice president of governmental relations with the Retail Merchants Association (RMA) in Richmond.

“Any time the government has to raise revenue it’s got to come from somewhere,” he says. “If they raise real estate tax rates, or fees on business licenses, then those costs eventually become pass-throughs to the consumer ... At the end of the day, who’s going to pay this bill is the big question.”

Mary Jo Fields, director of research at the Virginia Municipal League, says labor accounts for about 75 percent of most municipalities’ annual budgets. She predicts the 5 percent pay raise ordered by the General Assembly will be “a very big deal” as local governments write their budgets.

State Sen. John Watkins (R-Powhatan), the main sponsor of the legislation, explained to constituents in an emailed letter that the new law — once signed by Gov. Bob McDonnell — will make sure local governments and school boards contribute what they owe every year to the retirement plans managed by the VRS.

“Local governments have, for years, been paying the five percent portion of the employees’ contribution,” to the VRS, wrote Watkins. “Correspondingly, if they had not been mandated to provide this salary offset, they would have redeemed a windfall because the employees would now be paying for the contribution.”

The Virginia Association of Counties (VACo), Virginia Municipal League (VML), Virginia School Boards Association and Virginia Association of School Superintendents appealed to McDonnell to amend the original VRS legislation so that local governments could phase in the 5 percent increase in employees’ base salaries over five years. School districts had been granted that grace period in the bill.

An amendment giving local governments that option was among legislative changes proposed by McDonnell before the legislature’s “veto session” in late April. In presenting the bill for a vote on the last day of the regular session in March, lawmakers said McDonnell already had agreed to amend it.

While the amendment spreads out the cost for local governments, it fails to answer their fundamental complaint. They argue that the General Assembly has no right to dictate what they pay their workers. They say the order to bolster VRS’ long-term financial health could not come at a worse time because city, county and town revenues are either flat or declining. The falloff in local tax collections from the 2007-09 recession is still being felt.

The local governments told McDonnell that “the bill does nothing more than impose costly burdens on local governments and more importantly, on real estate taxpayers.”

Fields says local officials “are as angry about this bill as any bill I have ever seen.  The bill was not needed. We would have been happy if it allowed localities to do this but not require them.”

Given that Virginia’s economic recovery is still so tentative, it’s not likely that local governments will ask local companies to pay much more in taxes and fees this year, says Dean Lynch, VACo’s deputy executive director.
“With higher costs,” he says, “local governments will have to find increased revenue from somewhere ... We don’t know the full impact yet.”

Lynch says that the cost pinch from the pay raises will be felt especially in Virginia’s rural counties. He adds that the pay increases “in no way” eliminate the underfunded status of state pension programs but instead creates the perception that public employees are paying for their pensions.

He noted, however, that in the longterm employees would be receiving higher pensions.

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