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Virginia's state retirement trust fund reaches historic high at $100 billion
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Virginia's state retirement trust fund reaches historic high at $100 billion

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The Virginia Retirement System Trust Fund has topped $100 billion, a historic high that represents a dramatic turnaround from a year ago, when poor investment performance in the stock market caused a dip in pension funds for hundreds of thousands of public employees.

VRS officials still don't know the final return on investment for the fiscal year that ended last Wednesday night, but the $18 billion increase in the trust fund represents a 22% increase from a year ago that is likely to keep contribution rates "relatively stable" for state and local government employers in the two-year budget that Gov. Ralph Northam will propose in December.

"The health of the trust fund is strong," said O'Kelly McWilliams, an employment attorney who serves as chairman of the VRS Board of Trustees, which will set pension contribution rates this fall for state employees, teachers and other state and local government workers.

Investment income generates about two-thirds of the money necessary to fund current and future benefits for more than 772,000 public employees, retirees and others who have contributed to the VRS, the 18th largest public retirement system in the country. The return on VRS investments for the first 10 months of the fiscal year - through April 30 - was 22.3%.

"It's going to be one of the strongest fiscal years we've ever had," Chief Investment Officer Ron Schmitz told the Joint Legislative Audit and Review Commission on Tuesday, adding that preliminary results in May and June "look a little better."

The market performance could offset a potential $39 million increase in projected employer contribution rates - paid by state and local governments to cover the long-term retirement obligations to their employees - because of a new assumption that employees will live longer after retirement, requiring more money to pay long-term pension benefits.

VRS Director Trish Bishop said that investment returns would "mitigate" the effects of the revised assumption for employee mortality.

In an interview on Tuesday, Bishop said those returns also should boost the "funded status" of state pension plans, which dipped last year because of a disappointing 1.4% return on investments and a decision to lower the long-term assumed rate of return from 7% to 6.75%

"We do anticipate that because of these robust returns ... the funded status of the plans will improve," she said.

The VRS Board of Trustees will set pension contribution rates in October for teachers, state employees, judges, state police and other state law officers, based on an actuarial analysis of the fiscal year financial results on June 30. The board will set contribution rates for employees of local governments and other participating public agencies in November.

"We expect contribution rates will remain relatively stable in the upcoming [budget] biennium," Bishop told JLARC.

Northam will include the new contribution rates for teacher and state pension plans in the budget he will present to the General Assembly budget and finance committees on Dec. 16 for adoption during the 60-day legislative session that will begin on Jan. 13.

After years of partially funding the rates recommended by the VRS board, the assembly has fully funded them for state employees since 2017 and for teachers since 2018, as part of pension reforms enacted a decade ago to lower the state's unfunded pension liabilities. Those liabilities had soared because of investment losses during the Great Recession.

Currently, VRS is paying down about $20.8 billion in unfunded liabilities for the five state pension plans and $3.4 billion for local government plans, which are better funded because they have always paid the full rates certified by the retirement system. The state has reduced unfunded liabilities for its pension plans by $1.8 billion since 2013.

The analysis presented to JLARC did not reflect $100 million that Northam and the assembly provided in the budget for the fiscal year that began last Thursday. The money will pay off contributions to the teacher plan that then-Gov. Bob McDonnell and the assembly deferred in 2010 to balance the budget during the recession, as well as unfunded liabilities for state employee retirement health credits and other post-employment benefits.

JLARC and VRS officials remain concerned about the low level of voluntary contributions that employees hired since 2014 have made toward their own retirement under a hybrid plan that combines traditional pension benefits with retirement savings through 401(k)-style contribution plans.

Fewer than half of employees under the hybrid plan are making voluntary contributions toward their retirement, on top of the 5% required by state law. Those who don't make voluntary contributions would receive about 36% of their income in retirement, compared with 50% in state pension plans and 55% for those who make the full 4% voluntary contribution allowed by law.

The options for boosting retirement savings remain the same as when first presented five years ago - automatically increase employees' voluntary contribution by .5% every two years instead of three, unless they opt out; automatically require newly hired employees to contribute .5%, also subject to opting out; and increase the share of the mandatory employee contribution going to retirement savings, as opposed to paying for traditional pension benefits.

Separately, the legislative commission also heard potential options for using a projected $1.1 billion surplus in the state's higher education tuition program - including using a portion of the money to provide financial aid to students to make college more affordable for them.

The Virginia 529 program is funded at 157% of its long-term tuition obligations. The surplus is projected to grow to $3.8 billion by 2044 unless a portion of the money is used for what JLARC Director Hal Greer called "more meaningful purposes."

The commission approved a resolution directing its staff to conduct a yearlong study of the options for potentially using a portion of the surplus for "higher education access and affordability," such as financial aid for disadvantaged students.

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