Pension maneuver key to McDonnell's budgeting
As a state legislator for 14 years, Bob McDonnell knew that Virginia's budget is often balanced by elaborate accounting procedures that work well in the short run, but create long-term problems.
As a candidate for governor in 2009, McDonnell vowed to end the practice. "We will eliminate budget gimmicks," he promised in a policy paper that September.
Let's start with a little background before assessing whether the governor has kept this pledge.
Unlike the federal government, Virginia is constitutionally required to balance its budget. Lawmakers often talk about budgeting as a choice between cutting spending or raising taxes. But there is another option that the General Assembly often prefers. It involves transferring money in state accounts and other bookkeeping maneuvers.
These steps are perfectly legal, done in the open, and provide quick solutions that shield citizens from cuts in services or tax increases. But they're called gimmicks because they create long-range, structural problems in the budget.
When McDonnell was inaugurated in January 2010, he inherited a recession-wracked budget that was $4.2 billion short of the revenues needed to pay for existing services. Outgoing Gov. Tim Kaine, a Democrat, proposed closing the gap with spending cuts and a 1 percent increase in state income taxes that would have generated $2 billion.
The General Assembly, with McDonnell's blessings, rejected the tax increase. In February, McDonnell made his own budget recommendations. One of them, which was adopted by the legislature, called for about a $620 million savings by lowering pension contributions the state was scheduled to make during the two-year budget cycle that ends June 30, 2012.
The smaller contributions did not shrink benefits to 600,000 members of the Virginia Retirement System, including state employees and teachers. But they deepened long-term woes at VRS, which is an estimated $17.6 billion short of the assets needed to pay its projected pension liabilities over the next 85 years.
Legislation signed by McDonnell calls on the state, starting in 2013, to repay its reduced contribution to the pension over 10 years at 7.5 percent interest.
McDonnell this winter wanted to shift half of the $620 million debt to state employees. He proposed reducing the take-home pay of veteran bureaucrats by requiring -- for the first time in three decades -- that they contribute to their pensions.
The General Assembly rejected McDonnell's plan. But it did established the principle of employee participation by giving veteran bureaucrats a 5 percent raise and requiring them to make a 5 percent pensions contributions. Newer state workers -- those hired on or after July 1, 2010 -- were already required to pay into the pension.
Legislators also decided to resume making full contributions to the pension at the end of March 2012 -- three months earlier than planned. That will reduce the state's debt to VRS.
But the bottom line is that McDonnell balanced the budget by moving payments earmarked for the pension to help fund other programs. It was a short-term solution that has created a long-term imbalance. That's the very definition of a budget gimmick.
We should note that McDonnell has taken steps to repair another budget gimmick -- one he inherited.
The General Assembly, with Kaine's blessings in 2009, accelerated sales tax collections. It moved up a deadline for businesses to remit sales tax payments, allowing the state to collect 13 months of receipts during that fiscal year and creating a $234 million windfall. But in doing so, lawmakers created a future shortage in the state's annual sales tax receipts.
Legislators originally agreed to begin phasing out the accelerated collection in the budget year that starts next July 1. But at McDonnell's request, the corrective action began this July -- a year early -- when the state stopped requiring accelerated payments from small businesses. Even so, Virginia still has a $187 million imbalance to iron out from its advanced collections from big businesses.
McDonnell's advisers emphasize the governor has expedited efforts to repair budget gimmicks. But that doesn't change the fact that McDonnell, despite his campaign pledge to eliminate gimmicks, signed off on a huge one: holding back pension payments to balance the budget.
We rate this a Promise Broken.
McDonnell for Governor, McDonnell and Bolling unveil budget and spending reform plan, Sept. 2009.
Interviews with Ric Brown, Secretary of Finance, Sept. 14 and Sept. 19, 2011.
Interview with Tucker Martin, communications chief for Gov. McDonnell, Sept. 19, 2011.
Interview with Robert P. Schultze, director of the Virginia Retirement System, Sept. 15, 2011.
Richmond Times-Dispatch, State makes small dent in pension debt, but payback looms, March 6, 2011.
The Virginian-Pilot, McDonnell"s cuts target schools, state workers, Feb. 18, 2011.