Virginia unfunded pension liabilities could triple this year

If investment returns for Virginia’s pension system come in around negative 6%, the commonwealth’s unfunded liabilities could nearly triple for Fiscal Year 2022, according to a report from the Reason Foundation.

Virginia’s unfunded liabilities for FY2021 were slightly less than $6 billion, but early indicators estimate an average negative 6% return on investments for FY2022. If the commonwealth’s returns are at that rate, its unfunded liabilities would increase to slightly more than $17 billion.

Unfunded liabilities are costs that the Virginia Retirement System must eventually pay out to people, but does not yet have the assets to provide to them. Consistently high unfunded liabilities will either force higher contributions from employees or the costs will ultimately fall on taxpayers, according to Ryan Frost, a policy analyst at the Reason Foundation.

One year of returns will not require immediate changes to contributions, he said, but if it turns into a trend, then that might be necessary.

Frost told The Center Square that retirement systems are seeing bigger swings in unfunded liabilities every year because the plans are taking on higher-risk investments to meet needed returns. However, he said one bad year with these high-risk investments could result in very large increases in unfunded liabilities, such as Virginia is seeing.

Virginia’s unfunded liabilities were less than $3.17 billion in 2007, but swung up to more than $26.4 billion in 2009, which was primarily due to market changes during the Great Recession. The numbers fluctuated for the next decade, but did not go below $19 billion until 2021.

In 2020, the commonwealth had more than $25.4 billion in unfunded liabilities, but that dropped to less than $6 billion in 2021. Reason’s 2022 estimates suggest a large fluctuation for 2022 in the other direction, bringing the total to more than $17 billion.

Last year, more than 94% of the state’s pension system was funded, but Reason projects more than a 10-point swing for this year. They project it will decrease from 94.3% to 84.1%. Before the massive spike in unfunded liabilities after 2007, the state’s pension system was about 94.5% funded. The following year it fell to 82.7% and then in 2009, that dropped to 60.1%.

Some economists project that the country is headed into another recession; others say the nation might narrowly avoid one.

Frost said the report is based on estimating a negative 6% return, but those numbers might not be the commonwealth’s exact returns.

“These numbers will change based on actual returns,” Frost said.

Frost said pension systems should drop their assumed rate of returns as much as possible to avoid these types of problems. He said this would make the costs more predictable for employees and taxpayers.

Virginia is not the only state facing this problem. The report estimates that six states will see their unfunded liabilities jump by more than $20 billion and 12 states, including Virginia, will see their unfunded liabilities go up by more than $10 billion.