By Carten Cordell | Watchdog.org Virginia Bureau
ALEXANDRIA — If fiscal 2011 was a diamond year in investment growth for the Virginia Retirement System, fiscal 2012 is a worthless rock.
The state’s employee pension agency announced Wednesday it saw a net return 1.4 percent on its investments in fiscal 2012. It tanked because of its public equity portfolio, which had been fueling asset recovery from The Great Recession with high-risk windfalls.
VRS assets, which were valued at $54.6 billion in fiscal 2011, have dipped to $53.1 billion this year, as state officials blamed turbulent markets on a 4.6 percent decline in the public equity portfolio.
“We are pleased with the results we were able to achieve in a market fraught with volatility and depressed returns,” Chief Investment Officer Ronald Schmitz said in a news release.
A July report by the Joint Legislative Audit and Review Commission, or JLARC, called the public equity investments “typically higher risk investments that are expected to provide long-term capital growth and inflation protection,” the majority of which come from non-U.S. ventures.
The portfolio accounts for 46 percent of the trust fund’s assets, or more than $25 billion.
“They are putting more money into that because it assumes a higher rate of interest,” said Bob Williams, president of State Budget Solutions, a nonpartisan think tank that analyzes state and local budget issues. “Then they can game the system and tell the Legislature, ‘You don’t have to put as much money into pensions.’”
The bets paid off in fiscal 2011, when public equity helped fuel a 19.1 percent overall return on investments, which helped recover some of the losses suffered in 2008.
But this year’s trickle of growth doesn’t mean VRS will break even. The pension plan assumes 7 percent growth over a period of 30 years and, by those standards, has $23.95 billion in unfunded liability. So if VRS falls short of its 7 percent target on investment return, the hole gets deeper.
“It’s really bad news for Virginia,” Williams said. “If they only earned 1.4 percent, the Legislature has to make up not only the lost 5.6 percent, but also the interest they would have earned on that over the last year.”
That’s unlikely, since the Legislature generally doesn’t completely fund VRS’ annually required contribution, or ARC, the agency’s recommended payment to adequately fund the pension plan for the year.
The closest the Legislature has come to fully funding the ARC in the past decade was in 2008, when it funded 92.6 percent of the $1.3 billion request. Gov. Bob McDonnell proposed the largest contribution in state history in January, pledging $2.2 billion, but that was still short of a $2.8 billion ARC.
And despite the pension reform passed this year, which moves new employees onto 401k-style plans in January 2014, the current debt isn’t going anywhere; in fact, it’s getting much worse.
New accounting rule changes proposed this year aim to lower the return rate, reducing investment expectations and requiring more state money to cover the debt.
“Most of the pension reform plans around the country have just been for new employees,” Williams said. “Very few have recognized that if we make the adjustments for new employees, that doesn’t take care of the debt we have right now.”
The actual debt in the system, even, is up for debate. Williams pointed to three reports speculating Virginia’s unfunded liability in 2011 at between $10.7 and $53.8 billion.
So while state budgets shrink, pension contributions wither, calling for bigger risks to fund the gap.
“The crazy thing is there is no penalty for these retirement investors to make these risky assumptions,” Williams said.
VRS was unable to comment on the public equity portfolio by deadline.
Carten Cordell can be reached at [email protected]