Ken Cuccinelli was right when he claimed that taxes would increase during a McAuliffe administration; what he failed to point out was that they also had consistently increased during the current administration and would under his own. The difference will be that Governor McDonnell was allowed to borrow against the future and underfund capital requirements, in effect levying the tax on his successors and generations to come. Cuccinelli would have done much more of the same. Such maneuvers by the coming McAuliffe administration will not be met with the deafening silence afforded the current administration.
Maintaining the Illusion of Surpluses
- The Virginia Retirement System (VRS) "loan" amortization, the legislatively mandated 20% annual contribution deficiency, and total unfunded pension obligations
- Education infrastructure maintenance, capitalization and re-capitalization underfunding
- Transportation infrastructure maintenance, capitalization and re-capitalization underfunding
- Positive growth of revenue streams; particularly from areas such as agricultural production where weather and markets are beyond the influence of state government but have had a good run
Terry McAuliffe should conduct an audit early on so that the inevitable future claims of fiscal malfeasance can be placed in context when the bills come due. This one must be much more honest than the audit by McDonnell's team which made claims like turning up over $100 million that had been "mismanaged" by the Department of Transportation during the Kaine administration (conversely, McAuliffe should make certain that operating funds and reserves have not been drawn down). No, this audit should nail down underfunded and unfunded obligations that are currently, to a great extent, off the books. Some will come due during the next four years; some will continue to grow otherwise unacknowledged until they explode with consequences similar to the Detroit pension crisis.
Oh, heck, that little bit of insight was in response to questions arising from a VRS investment in Star Scientific that yielded a loss of $87,581 on an investment of $289,000. Worse, this was after a series of losses by Maureen McDonnell in the same stock. But as we have all been told, Maureen only shares her investment strategies with her financial benefactor, Jonnie Williams.
"Schultze said it is not clear why the internal program, devised by VRS investment staff to use algorithms to analyze stock data, recommended purchase of stock in a company that hadn't turned a profit in 10 years." - Richmond Times Dispatch
And what we don't know is the opportunity cost of the hundreds of millions of dollars Governor McDonnell siphoned from the VRS so that he could claim he balanced the state budget. Allowing that those funds would have been spread across the risk spectrum rather than invested only in public securities, those millions would still have been yielding that net 11.8% had they not been used as a long term obligation of the state, adding to the already unfunded obligations of the system.
Chairman Cantor also fails to mention that this follows a year when the system's investments yielded a whopping 1.4%; not a performance that enhances long-term solvency. Certainly, in her view, last year was the result of the market rather than mediocre performance by her staff. One year the Obama market, the next pure investment genius.
I am afraid you may not comprehend that for a time Ken's entire investment portfolio consisted of a single position in a rather murky business venture that was certainly high risk. That's not the kind of investment philosophy a more business savvy person with seven children would employ. It is certainly not the kind of philosophy a Governor should operationalize, say with investments made by the Virginia Retirement System (VRS). It's probably not a coincidence that at almost the same time Bob's pals were risking the future of the VRS investing in high risk derivatives (we should demand a report on specific outcomes from those investments. It is quite possible they did very well; but we usually hear about such things). Ken may just have wanted to have some of that action too. But you really want someone in charge of the family treasure who knows something about business and investments.
You see, with Star Scientific, Ken was disqualified on two fronts when he let emotion rule his decision to invest. First, Ken has a history of misjudging people. Maybe you remember Bobby Thompson who gave your husband a lot of money stolen from veterans. Ken bought the whole scheme, hook, line, and sinker. This also speaks to his ability to critically think, something a lawyer should be able to demonstrate; worrisome. But that's not the second issue. No, the second is Ken's casual approach to science. When investing in a company with the word "scientific" in its name, it might pay to actually be able to discern how science works. We already know that Ken would rather deny something he does not want to believe rather than analyze the evidence. Of course, he's burned his bridges with a significant portion of the scientific community, so the people from whom he is likely get advice are probably only those who are "like-minded." Not being a good judge of character, maybe he shouldn't be allowed to choose an investment advisor either. He might reach out to his pal Bob Purkey, who, self-proclaimed investment genius that he is, let that whole VRS derivatives position blow right by him.
Bob McDonnell has consistently demonstrated that he is all show and no go. Always at the ready to take credit for anything that plays well with his constituency, he chides responsibility when a misstep challenges the façade of success. This time, though, the Texas two-step isn't serving him well. He has drawn unwanted attention.
Take his running job creation and trade mission storylines. Neither of these campaigns was designed to lift the Virginia economy. Both were empty vessels floated to buoy his resume. If perchance employment grew and/or foreign investment occurred, he could always claim credit via post hoc ergo proctor hoc attribution. Hey, don't let credit go wasted. Democrats in Virginia aren't having any of it.
But in the cases like his failed attempt to privatize the Alcohol Beverage Control (ABC) stores, his big lies about righting the Virginia Retirement System while robbing the trust to "balance the budget," and handouts to indigents like Dan Snyder and Donald Trump, all things he can't deny he owns, he's left a trail of deceptions whose accumulation along with his well-documented reactionary pronouncements on social issues, have derailed his ambitions. He may end up the lamest of lame ducks.
Readily available information is insufficient to determine if future Virginia retirees should consider themselves fortunate, but they seemed to have dodged the bullet during a flight to risk taken by their pension trust. Standard accounting and reporting procedures have changed since the meltdown of 2008, but what is clear is that at the end of the last available reporting period (June 30, 2011) the fund had unwound itself from a derivatives position of nearly $7 billion reported in 2009 to a much more reasonable (but not necessarily justifiable) $1.3 billion.
What Delegate Purkey (R-Virginia Beach) has claimed is the result of his committee's hand on the steering wheel, The Virginia Retirement System reported a one year return on investment of 19.1% last year. But what the fund holds in assets is an amount less than that reported three years earlier: $51.3 vs $51.7 billion. So a three year decline of half a billion dollars. Not bad at all, considering the turmoil during that time.
But here are some questions:
- What was the net return on the derivatives?
- Was the risk inherent in the derivatives justified?
- If the return has justified the risk, why unwind?
- Would a flight to quality have provided a similar return without the risk?
One other question: Will Bob McDonnell repay VRS with the 33% two year gain the funds would have earned had they been paid when obligated?
ALEC chair Bill Howell (HB 1129) introduced a bill that makes state employees and law enforcement pay 6%, instead of the recently enacted 5% of gross income into VRS. Local employees and teachers will be required to pay 5%. At the same time, the bill contains provisions guaranteed to result in lower pensions for future retirees and a limit on cost of living increases for them. Howell also introduced HB 1130, which forces state employees and teachers hired after Jan. 2014 into a "hybrid" retirement plan that will lower dramatically the guaranteed pension of retired employees, while lowering state and local government obligations to their employees...but not for 20 years or so.
The bills rammed through in the closing hours of the legislature is the way the state has devised to make employees and local government pay for twenty years of underfunding the state's obligation to VRS. For a long time, state politicians found it all too easy to rely on ever increasing trust fund returns from the stock market. Then, the bubble burst. The VRS piggy bank was dangerously empty, and the GOP-controlled government in Richmond had to find somebody to pay the piper. It was easy for them to finger their scapegoat: the workers themselves, as well as future retirees.
There are some facts in this whole mess that the state hopes nobody will remember.
People might think that having even a partial defined contribution system would lower state costs, but it simply creates a host of possible problems for the next twenty years or so.
According to Robert Carlson, chair of the Fairfax pension system board of trustees, a proposal in 2011 to switch all new employees to a 401k-like defined contribution plan was shelved because "this would significantly raise the cost." Rather than look for other ways to improve the solvency of VRS, Bill Howell opted to introduce an ALEC-inspired hybrid plan that passed both houses and is sure to be signed by Bob McDonnell.
Carlson also pointed out, "Any financial benefits from the new [hybrid] plan won't be realized for 20 years or longer. In fact, creation of the new plan will increase the cost of the DB plan until it winds down." He went on to say that as more and more state employees and teachers opt for the hybrid system, the cost of running the original VRS system will increase.
So, this latest Republican "plan" to solve Virginia's pension woes simply creates a system that can't possibly save money in the near term, at the same time it shifts onto local government more of the cost of providing a pension system.
Anyone tracking bills affecting teachers introduced in this session of the General Assembly quickly discovers that the GOP in Virginia doesn't agree with the President's premise that teachers "deserve our support." Instead, they've declared war.
Greg Habeeb (R-Salem) and Ralph Smith (R-Roanoke) introduced bills that would let school divisions wait until June 15 to inform people that they have no job the coming August. Presently, teachers have to be notified by April 15, giving them time to seek another teaching position. Chris Stolle (R-Virginia Beach) has a bill allowing any local school board to switch all its employees to a defined contribution retirement, effectively destroying the Virginia Retirement System for future teachers in that locality. Mark Obenshain (R-Harrisonburg) sponsored a bill allowing public charter schools to opt out of VRS and have up to 50% of their teachers unlicensed by the state.
Perhaps the worst bill before the Assembly is Dickie Bell's (R-Staunton). It would eliminate teacher tenure and the right to a hearing before the school board if a teacher who has attained a continuing contract is summarily fired. It would also change the probationary period for new teachers from three to five years, the time when they can be fired without cause. After that, teachers would be given three-year contracts for the rest of their career, meaning that in times of tight budgets many school boards would get rid of their most expensive (i.e., most experienced) teachers.
These GOP bills are meant to take away the very things that make teaching an attractive option for college graduates.