The House Appropriations Committee will propose to pay off pension contributions that were deferred six years ago during a budget crisis and use the savings to finance a raise for state employees of more than 2 percent in the first year of the pending two-year budget.
Appropriations Chairman S. Chris Jones, R-Suffolk, confirmed Thursday that the budget the committee will release on Sunday will include a raise in the first year, rather than the second, as Gov. Terry McAuliffe proposed in December.
He said the money for the raise would come in part from about $88 million in total savings from the early payoff of a deferred debt on state employee pensions. Those savings reflect both money from the state general fund and non-general fund sources such as higher education.
“We’re going to reinvest the savings back into our workforce,” the chairman said in an interview.
Earlier, Jones spoke on the House floor about the committee’s plan to pay off the remaining $189.5 million in debt for state employee pensions to the Virginia Retirement System six years ahead of schedule.
The decision saves the state interest set at 7 percent a year when the General Assembly deferred more than $700 million in state retirement contributions — $1.1 billion including the local share of teacher pensions — to balance the 2010-2012 budget during the recession.
“We had no choice,” said Jones, who served on the budget conference committee that made the decision in 2010.
Jones said the repayment would lower the retirement contributions required for faculty at Virginia’s colleges and universities by almost 1 percent of payroll. “They’re going to be able to moderate tuition increases,” he said.
Legislators are working to approve a two-year budget for July 1, 2016, through June 30, 2018.
Appropriations officials did not specify how big the raise would be in the first year. McAuliffe proposed to spend $76.2 million on a 2-percent raise in the second year of the budget. “It will exceed what was introduced in the budget,” Jones said.
The plan does not include the deferred debt on the state’s share of teacher pensions. Nor does the committee propose raises for teachers in the budget’s first year, which begins July 1. McAuliffe’s budget includes $83.3 million in the second year to give teachers a 2-percent raise, based on a matching contribution by the local school division.
Last year, the assembly spent $193 million to pay down the deferred debt on teacher pensions, which saved local school divisions about $34 million over the next six years.
The money for the proposed pension repayment would come, in part, from a proposal to use short-term debt to pay for deferred maintenance of state buildings and equipment, instead of cash as McAuliffe proposed. The interest rate on the bonds would be less than half of the interest rate on deferred debt to VRS and the state would establish a revolving loan fund to pay for maintenance on an ongoing basis.
R. Ronald Jordan, executive director of the Virginia Governmental Employees Association, was elated by the committee’s pay proposal, which he called “a great, business-based approach to employee compensation.”
“The result is a win-win for state employees and VRS,” he said.
The VRS proposal is the latest effort by the General Assembly and McAuliffe to undo the damage done to the pension system by the deferred contributions and the state’s repeated failure to pay the full contributions the retirement system and its actuary recommended.
In 2012, the legislature and then-Gov. Bob McDonnell adopted a package of pension reforms that committed the state to fully fund the recommended retirement contributions by the 2018-2020 biennium.
Last year, McAuliffe and the legislature included $32 million in the budget to fund state employee pensions at 90 percent of the contribution rates recommended by VRS, instead of the 80 percent required by law. That move saved the state an estimated $85 million in unfunded pension liabilities over 20 years.
Last fall, House Appropriations signaled that it would seek to fully fund the recommended contributions for state employees in the fiscal year that begins July 1.
McAuliffe went further in the budget he proposed in December by including an additional $87 million to fully fund the recommended teacher contribution by the second year of the budget, a year ahead of schedule.
The committee’s pending proposal to completely repay the deferred VRS contributions is part of a concerted effort with the McAuliffe administration to produce a “structurally sound” budget.
“The wisdom of the House’s conservative and cautious approach to state budgeting has been proven time and time again,” said Speaker William J. Howell, R-Stafford, who has proposed a state commission to study “employment retirement security and pension reform.”
In his floor speech, Jones also focused on the House’s proposed bond package of $1.5 billion, which is almost $1 billion less than the $2.4 billion McAuliffe sought.
The House based its bond proposal on the $1.1 billion needed for 31 capital projects that already have been planned, $350 million to expand the capacity of Norfolk International Terminal at the Port of Virginia, and almost $60 million for wastewater treatment projects.
Jones said the House package also would provide money to plan more than 25 new projects, including the construction of a juvenile correctional center in Chesapeake to replace either the Beaumont Juvenile Correctional Center in Powhatan County or the Bon Air facility in Chesterfield County. The governor proposed up to $90.5 million in bonds to replace both centers as part of a plan to transform the juvenile justice system to include smaller facilities and more community-based alternatives.
In his floor speech, he also outlined a proposal to use extra money generated by non-withholding income taxes to pay state debt service early. McAuliffe and the assembly budget committees agreed to use a so-called “collar” on the volatile source of revenue that leaves an expected $750 million in revenues out of the budget. They want to hedge against a sudden drop in payments by people who don’t withhold income tax from their paychecks or who sell stock for capital gains.
Their caution stemmed from the sharp decline in estimated tax payments in May 2014, leading to a projected $2.4 billion shortfall in this biennium that later eased as the unpredictable revenues rebounded.
Jones endorsed McAuliffe’s decision this week to not change the revenue forecast for the budget in mid-session, as the governor has done the past two years.
But he said he continues to have concerns about the economy and its effect on state tax revenues.
“We don’t print it,” Jones said. “We have to earn it before we can spend it.”