McLean Citizens Association (MCA) board members on Feb. 2 approved two resolutions aimed at shoring up pension plans used by Fairfax County’s government and school system.
Within the county government, employees participate in the Employment Retirement System (ERS), Police Officers Retirement System (PORS) or Uniformed Retirement System (URS), which caters to firefighters, Emergency Medical Services workers and Sheriff’s Office employees. Many county employees also take part in the federal Social Security program, said Louise Epstein, who chairs MCA’s Budget and Taxation Committee.
Fairfax County Public Schools (FCPS) employees also participate in Social Security and are eligible for other pension plans as well.
About 80 percent of school employees take part in the Virginia Retirement System Teacher Plan (VRS Teachers), which is run by the state government, plus the Education Employees’ Supplementary Retirement System of Fairfax County (ERFC). The remaining approximately 20 percent of FCPS employees take part in the county’s ERS plan.
All of the above plans earned higher-than-expected returns last year. The Uniformed Retirement System earned 25.3 percent, Employment Retirement System and ERFC brought returns of 26.8 percent, VRS Teachers had a 27.5-percent return and the Police Officers Retirement System led the pack at 31.2 percent.
“For all pension plans around the United States, basically the 2021 [fiscal] year was a gangbuster year,” Epstein said.
MCA board members in previous resolutions have expressed concern that some of the plans were based on unrealistically high returns.
Pension analysts look at estimated and future payments and then use a discount (interest) rate to compute the future value of those projected payments back to a certain date, Epstein said.
“The interest rate that one chooses will have a big impact on the present value,” she said.
MCA members analyzed the county’s pension plans and found they were using negative amortization, or what amounted to a balloon mortgage payment in which the county did not pay enough to prevent the balance from rising over time, Epstein said.
Lower investment returns were by far the largest source of pension-plan liabilities, she said.
Administrators of pension plans with higher discount rates sometimes “reach for yield” by engaging in higher-risk investments, Epstein said.
Conversely, those overseeing plans with lower discount rates tend to invest more conservatively, she said.
The VRS plan in 2019 switched from a 7.25-percent discount rate to one assuming a return of 6.75 percent, and in 2021 the boards of the county’s three pension plans followed suit.
Only the ERFC plan still assumes a 7.25-percent rate of return. One of MCA’s resolutions passed Feb. 2 urged the School Board to press for an assumed return rate to 6.75 percent and for the pension plan’s board of trustees to vote in favor of that action.
(Corporate pension plans, which tend to be fully funded, often use discounts in the 3-percent range, Epstein added.)
MCA in January 2021 passed a resolution urging the School Board to hire an independent actuarial firm to undertake a stress test and sensitivity analysis for ERFC to help it become more financially sustainable.
One of MCA’s Feb. 2 resolutions called for ERFC trustees to continue amortizing legacy unfunded liabilities from 2011, with the goal of eliminating them by or before 2041.
ERFC also should employ a level- or fixed-amortization process, instead of using a negative amortization through rising payroll assumptions, and amortize new, unfunded liabilities over periods lasting no more than a decade, MCA’s resolution read.
Had ERFC’s administrators in 2011 chosen a fixed or level payment instead of one assuming a 3.25-percent annual payroll increase, the plan would have collected $113 million more and with interest have knocked $200 million more off of its unfunded liability, said Jim Beggs, chairman of MCA’s Education and Youth Committee.
The above projections were based on a 30-year amortization approach; going with a 15-year amortization method likely would have funded the plan fully by now, he added.
In addition, the School Board should commission a study of possible inflation impacts on ERFC’s long-term health and inform the public how that retirement plan will mitigate adverse inflation consequences. High inflation could affect investment returns, Beggs said.