Virginia Association of Counties

November 9, 2009Robert P. Schultze

Director

2

Agenda

• VRS Overview

• Funded Status and Rate Setting

• What’s on the Horizon

VRS Overview

4

VRS Overview

• VRS is the 24th largest public or private pension system in the U.S.

• There are almost 600,000 members, retirees and beneficiaries.

55

VRS Total Membership

Teachers 148,461

Political Subdivisions 105,404

State Employees 80,808

State Police Officers’ Retirement System (SPORS) 1,826

Judicial Retirement System (JRS) 416

Virginia Law Officers’ Retirement System (VaLORS) 10,014

Total Active Members 346,929

Retirees/Beneficiaries 141,746

Inactive/Deferred Members 107,551

VRS Overall Impact 596,226

As of June 30, 2009

66

50,000

70,000

90,000

110,000

130,000

150,000

170,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Fiscal Year

Tota

ls

State Teacher Localities

Active Members

77

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Fiscal Year

Tota

ls

State Teacher Localities

Retirees

8

New Retirees Added to Payroll by Fiscal Year

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

State Teachers Pol. Subs

9

Average Age, Service, Pay and Benefits (2008)

State Teachers Local

Actives:Average Age 47.36 44.45 45.2Active Service 12.68 11.17 10.0Avg. Salary $46,112 $46,650 $38,276

Retirees:Avg. Age @ Retirement 60.76 59.36 61.30Avg. Service @ Retirement 24.22 24.63 18.60Avg. Benefit @ Retirement 41.2% 41.9% 31.6%Avg. Benefit - Current Retirees $15,901 $19,895 $11,235

10

Pension Benefits for Employees of Local

GovernmentsGeneral Employees Full benefits at age 50 with 30 years of service

AFC x 1.7% x Yrs. of Service = Annual Benefit

Example: $50,000 x .017 x 30 Yrs. = $25,500

11

Pension Benefits for Employees of Local

GovernmentsHazardous Duty (LEOS) Full benefits at age 50 with 25 years of service

AFC x 1.7% x Yrs. Of Service + Hazardous Duty Supplement = Annual Benefit

Or

AFC x 1.85% x Yrs. Of Service + Hazardous Duty Supplement = Annual Benefit

Example: $50,000 x .0185 x 25 Yrs. + $12,456 = $35,581

Rate Setting and Funding Benefits

13

Funding VRS Benefits

• 68% of benefit costs funded by investment earnings

• 32% of benefit costs funded by employee/employer contributions

1414

Net Assets Available for Benefits

$22.2

$26.9

$31.7$35.7

$40.8$37.7

$34.4 $34.7

$40.0

$44.1

$48.7

$58.3$55.1

$42.9

$47.8

$0

$10

$20

$30

$40

$50

$60

As

se

ts in

bill

ion

s

1996 1998 2000 2002 2004 2006 2008 10/19/09*

* Estimate as of 10-19-09

151515

VRS Fiscal Year Returns

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.019

89

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

% R

etu

rn

16

Investment Returns

• FY2009 Return on VRS Trust Fund was negative 21.1%

• Actuarially assumed return was 7.50%• Returns needed over various periods to “make

up” the loss:– One year: 46.5%– Three years: 19.2%– Five years: 14.4%

17

Funded Status

• Compares assets available to pay benefits with present value of future liabilities

• Asset/liability ratio is typical measure

• Percentage of assets available to pay present value of all future liabilities (until the last member of the plan dies)

18

Funded Status: Teachers

0%

20%

40%

60%

80%

100%

120%

1994 1998 2000 2002 2004 2006 2008 2010 2012

Assumptions: • FY 2009 investment return is -21.1%•All projected years investment return is 7.5% and 2.5% inflation rate with 20-year amortization period.•Employer contribution rates for FY 2009 and FY 2010 are fixed at 8.81%•Actual value of assets subject to 5-year smoothing with no corridor.

19

Funded Status: Local Governments

0%

20%

40%

60%

80%

100%

120%

1994 1998 2000 2002 2004 2006 2008

2008 Aggregate Funded Ratio – 565 Plans

Note: 2008 average funded ratio of 565 plans = 95.7%

20

Funded Ratio for Top 10 Localities (2008)

Locality Asset Value (in millions) Funded Ratio

City of Virginia Beach $1,069 83.8%Henrico County $757 85.3%Prince William County $621 88.7%Chesterfield County $533 86.7%City of Chesapeake $508 86.8%City of Alexandria $330 88.5%City of Hampton $325 79.9%Loudoun County $291 87.5%City of Lynchburg $198 74.5%City of Portsmouth $189 94.8%

ProjectedContribution

Rates

22

Contribution Rates

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

Teachers

Locals

• Projected rates are based on an 8% rate of return, a 3% inflation rate and a 30-year amortization.

• These employer rates do not include the 5% member contributions that also are paid by employers.

23

Employer Contribution Rates

Current Funded Rates*

FY 2010

2007 Board Certified Rates**

2009 Board Certified Rates**

State Employee

6.26% 8.02% 8.46%

Teacher 8.81% 11.84% 12.91%

*Current funded rates are based on assumptions applied in the 2009 Appropriations Act (8% rate of return, 3% inflation rate, and a 30-year amortization).

**Board certified rates are based on the following assumptions (7.5% rate of return, 2.5% inflation rate, and a 20 year amortization period).

Note: These employer rates do not include the 5% member contributions that are also paid by employers.

24

Governor’s Budget Reduction Plan

• Reduce state and teacher employer contributions to VRS April – June of 2010.– Reduction will not affect benefit provisions or the

accumulation of contributions in member accounts– The state will pay the 5% member contributions that are

picked up and paid by employers

• Suspend contributions for OPEB programs for April – June of 2010, except for local government health insurance credit.

25

Governor’s Budget Reduction Plan

Reduce State and Teacher Employer Pension Contributions for 4th Quarter FY 2010

Employer Group Projected Fourth Quarter Employer Contribution

(GF and NGF)

Funds Captured in Governor’s Reduction

Plan*

State Employees $79.58 million $52.7 million

Teachers $179.4 million** $51.3 million***

OPEBS**** $78.97 million $30.90 million

Total Pension and OPEB Reduction

$337.95 million $134.9 million

*Removes Federal, Trust and Agency, Internal Service, and Transportation funds from the NGF amounts

**VRS data includes local funds as well as instructional and support staff

***Includes only those costs included in the SOQ formula

**** VRS data includes political subdivisions and local funds, as well as instructional and support staff.

26

Governor’s Budget Reduction Plan

• VRS had planned to receive about $2.4 billion in contributions in the budget approved by the General Assembly for FY2010

• Reduced state and local contributions are estimated to be about $338.0 million

• Reduction represents a 14.1% reduction in contributions to the VRS Trust Fund

PolicyAlternatives

28

Plan Design Changes Identified by PWC & JLARC

Applicable Savings/Cost Avoidance

Benefit Change Current Members

Non-vested

members

New Hires

Current Retirees

Immediate Long-term

Employee-paid Member Contribution (2%)*

√ √ √ √

Increase retirement age 60** √ √ √

Reduce COLA for new retirees***

√ √ √ √

Combination Plan √ √

Cash Balance Plan √ √

Defined Contribution Plan √ √

*PWC & JLARC assumed that the contributions would be phased in over a four-year period.

**PWC and JLARC did not apply retirement age design change to SPORS and VALORS.

***JLARC & PWC suggested that the General Assembly could consider exempting active employees within several years of retirementeligibility from this change. Such an exemption could help limit the extent to which employees in this group may have to alter their retirement plans. This exemption could also help avoid a sudden increase in employee retirement—and therefore loss of experienced employees—just prior to the effective date.

29

Pension Envy

• Only 60% of workers in private-sector have access to an employer-sponsored retirement plan

• One-third of those eligible do not participate (leaving only 40% with coverage)

• Fewer than one in five have a traditional pension (DB) benefit

• Some employers have suspended or eliminated their 401(k) match

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Reliance on Social Security

• 56% of those on Social Security rely on it for more than half of their income.

• For 30% of Social Security recipients, Social Security accounts for 90% of their income.

• For 19% of Social Security recipients, Social Security is their sole source of income.

31

Trends in Other States

• Higher normal retirement age• Higher mandatory employee contributions• Longer final average salary periods• Lower retirement multiplier (future service)• Stricter service purchase provisions• Smaller COLA’s• Increased use of hybrid plans• Little discussion of switching to defined contribution

plans• Growing media and popular resentment toward

public employee retirement benefits.

Thank you!