Planning for the future: McDonnell retires policy of tax increases

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February 24, 2011

10:15 PM

Virginia Gov. Bob McDonnell isn’t going to gain many supporters by asking state workers to contribute to their pensions for the first time since 1983. His plan, a substitution of substance for show, has, however, already incurred the wrath of public employees and the state Senate. Such institutions have displayed consistent opposition to any budget move that would force them to bite the bullet and embrace reality. Fortunately for Virginia’s future — and that of the College of William and Mary’s — that’s exactly what the governor seems intent on doing.

McDonnell’s proposal requires state workers to pay 5-percent of their income to their defined benefit retirement program, offset by a 3-percent raise, with the goal of keeping Virginia’s long-term liabilities at a manageable level. To be fair, Virginia’s pension shortfall is not insurmountable: Each taxpayer owes an average of $1,362 to pay for $10.7 billion in unfunded pension liabilities. But being comparatively healthy still doesn’t mean we have that money. Remember, it’s our generation that’s going to end up paying for today’s lack of restraint.

Far from having an onerous retirement plan, Virginia is one of the few states that does not yet require employee contributions. This proposal merely brings our pension plan into line with the rest of the country. Even though this isn’t going to cover the entire shortfall — the system will still only be 75 percent funded — it is a significant step toward, as McDonnell says, “long-term solvency.”

These reforms are focused on keeping Virginia’s debt down and future financial obligations manageable. Part of the decrease in state funding at the College is tied to the efforts to keep the pension system solvent, and any effort to control pension costs should be understood as future money in the College’s pocket — without having to resort to massive tuition hikes.

Some suggest that these shortfalls can be covered through revenue increases, but Virginia’s average state and local tax burden is already in the top half of the nation. Whether you like it or not, 59 percent of Virginia’s voters chose a governor who unequivocally refused to raise taxes of any sort.

The recession did a number (specifically $17 billion) on the pension fund’s assets, and, in the short term, benefits have been withheld so the state can mitigate its deficits through the hard times. That money will have to be paid back (with interest), however, and it can’t be assumed that the fund’s growth rates are going to look anything like they did several years ago.

Yes, state workers are going to have to take a cut for financial problems for which they weren’t responsible, and yes, a good percentage of the shortfall can be tied to the General Assembly’s lower-than-recommended funding. Regardless, private as well as state workers have been hurt by economic conditions out of their control, and playing the blame game only shifts the focus away from addressing the problem. It certainly doesn’t help state employees if Virginia has to pay higher interest rates on its debts, or if it is forced to take action that hurts its reputation as one of the best states in which to do business.

McDonnell’s plan is far from the only thing the state needs to do to ensure a secure fiscal future, but it’s a start. Because it’s not realistic to think Virginians will be amenable to having one of the highest tax burdens in the country, we have to keep long-term liabilities in check if we want to maintain our status as one of the most financially sound states. Some of us will inevitably end up working as Virginia state employees, and we’d like that pension system to be around when we get to retirement age. In order to ensure the plan’s security tomorrow, tough choices have to be made today.

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