A Republican-led push to shift Virginia’s public employees toward a 401(k)-style retirement plan could cost the state up to $25 million, a new report says.
A bill approved by the General Assembly but amended this week by Gov. Bob McDonnell requires employees hired after Jan. 1, 2014 to participate in a new pension plan that will be a hybrid of the current system and a defined-contribution style plan that is common in the private sector. Existing employees can opt into that plan as well.
McDonnell heralded the changes as “historic legislation to further improve the long-term solvency of the Virginia Retirement System.” But The Commonwealth Institute for Fiscal Analysis, a nonpartisan nonprofit focused on issues impacting low-income residents, released a report Wednesday that said the upfront costs of the change would be between $5 million and $25 million, and that future administration costs would be higher, too.
The study follows up on a legislative fiscal analysis of he bill, which acknowledged “significant costs” associated with the change but provided no estimate of those higher costs. The Commonwealth Institute compared Virginia to other states that have taken similar routes, most notably Oregon, whose 370,000-person public workforce is similar in size to Virginia. Oregon spent upward of $30 million between 2003 and 2007 to implement the new system.
But the overwhelming majority of the employees who will see the hybrid pension plan aren’t currently in the workforce. In that regard, the upfront costs might be more in line with Michigan, which budgeted about $4.5 million in 2010 to make a similar change for its 11,600 public employees.
McDonnell spokeswoman Taylor Thornley said those costs “will certainly pale in comparison to the tremendous savings these reforms will produce. The Fiscal Impact Statement on [the pension reforms] estimates a savings over the next 20 years of $3.6 billion. Savings of that magnitude will dwarf the costs that will be accrued during the transition.”
The study also said the hybrid plan will have higher costs to administer. While a defined benefit pension plan has a one lump sum for the state to watch over for all public employees, a 401(k)-type account “requires the maintenance of individual accounts with daily updates,” said Michael Cassidy, president of The Commonwealth Institute. That means more personnel to oversee the program.
“It’s important to remember that much of this is a self-inflicted wound,” Cassidy said. “If legislators had been responsibly funding the VRS at the recommended levels all along, we would not be in this situation.”
