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The Fairfax County School Board should have an independent actuarial firm conduct a “sensitivity and stress test” for one of the school system’s pension plans to ensure it remains sustainable, McLean Citizens Association (MCA) board members agreed in a resolution passed Jan. 6.
The chosen actuarial firm should not have provided services within the past decade to Fairfax County Public Schools (FCPS) or the Education Employees’ Supplementary Retirement System (ERFC), read the resolution, which was compiled by MCA’s Budget and Education & Youth committees.
MCA board members especially were concerned about $950 million in unfunded liabilities for the $3.54 billion worth of ERFC pension benefits owed. Between fiscal 2000-2010, ERFC only obtained a 4.3-percent annual return – far lower than the projected 7.5 percent, the resolution read.
Officials lower that assumed return rate to 7.25 percent in 2015. Between fiscal 2011-2020, ERFC’s returns exceeded that targeted percentage, yet the plan’s unfunded liability grew by more than 50 percent during that period, the resolution read. This occurred even though the School Board had instituted a less-generous benefits package for employees hired on or after July 1, 2017.
Between 2002 and 2019, unfunded pension liabilities for the total payroll of active FCPS employees rose from zero to 54 percent and the school system’s contributions rose from $29 million to $105 million. The system’s contribution rate also increased from 3.69 percent to 6.44 for the active-member FCPS payroll during that time and ERFC’s actuaries have recommended that the employer-contribution rate rise to 6.7 percent of salary in fiscal 2022, the resolution read.
“If you look at the actuarial-valuation studies, they say to expect further increases,” said MCA member Louise Epstein, who presented the resolution to the board. The situation, which has stemmed from overly optimistic assumptions on returns and how long recipients will live after retiring, conflicts with ERFC documents that require the plan’s seven trustees – six of whom are FCPS employees and none of whom are required to have pension or investment experience – to set contribution rates that will remain about level for succeeding generations, she said.
Combined, the unfunded liabilities of the school system’s ERFC and VRS pension plans were $3.38 billion as of June 30, 2020, MCA’s resolution read.
MCA’s recommended actuarial “stress test” should resemble the one given to the state-run Virginia Retirement System (VRS), the resolution read. The resolution also urged that the actuarial firm present its findings directly to the School Board in fiscal years 2021 and 2022. The draft resolution also called for the company’s recommendations to be implemented no later than fiscal 2023, but the makers excised that item because they did not know what the recommendations would be, Epstein said.
About 80 percent of FCPS employees participate in ERFC, VRS and Social Security, all of which pay benefits for as long as the recipients live.
According to a 2018 VRS stress test, that plan expected a 6.83-percent median annual return on its assets. That figure was down 8 percent from assumptions used from fiscal years 1996-2004, 7.5 percent from fiscal 2005-2009 and 7 percent from fiscal 2010-2018, MCA’s resolution read.
The largest VRS plan, VRS Teachers, in 2019 assumed an annual return on assets of 6.75 percent. Virginia leaders in 2012 modified VRS Teachers by creating VRS Hybrid, a plan that applied to employees hired on or after Jan. 1, 2014. The hybrid plan reduced employer costs as a percentage of employee salaries, the resolution read.
The MCA board’s resolution was the latest of several in recent years to sound the warning bell about unfunded liabilities in pension plans used by the Fairfax County government and the county’s school system. Escalating pension allocations drain resources needed for other county priorities, MCA members said.
The county’s five pension plans do not reflect their costs accurately, said MCA board member Jim Beggs. None of the plans is sustainable, agreed MCA board member David Pritchett.
“The contributions are simply not enough to meet the needs of people who have pension plans and want to draw on [them],” Pritchett said. “You’re basically taking away money from pensions that likely would go to people who are young now and working. When they get to pension age, it’s unlikely there will be anything left, because the funds just aren’t there.”
The MCA board passed the resolution nearly unanimously, although no final tally was available. MCA president Robert Jackson thanked the committee members who drafted the detailed, five-page document.
The committee members “did an amazing job with a complicated subject,” he said.