RICHMOND — The Virginia Retirement System expects a 2% return on investments in the fiscal year that ended June 30 after weathering a deep loss in the state pension system’s value in March because of the economic chaos caused by the coronavirus pandemic.
The retirement system regained more than $5 billion in its investment value in the last three months in a market rebound that Chief Investment Officer Ron Schmitz called “really extraordinary” in a meeting of the Joint Legislative Audit and Review Commission on Monday morning.
The system had lost about $3.5 billion by the end of March, compared with a year earlier, as the state and national economy nearly shut down to slow the spread of the COVID-19 virus in a public health emergency Gov. Ralph Northam declared early that month.
Instead, VRS estimates that it ended the fiscal year on June 30 with about $82 billion in its retirement trust fund, compared with less than $77 billion at end of March, when the system’s investment income was down by almost 5% for the fiscal year.
“These are preliminary numbers,” VRS Chairman O’Kelly McWilliams cautioned legislators on the panel on Monday.
The rebound is critical to the health of the pension system, which relies on investment income to pay retirement benefits for almost 743,000 teachers, state and local government employees, retirees and other beneficiaries.
Last year, VRS paid $1.6 billion more in retirement benefits than it received in contributions from members and their employers, but the expected gain in investment income is expected to offset the shortfall, Chief Financial Officer Barry Faison said in an interview.
The biggest swing came in April, when the retirement system recovered about $3.5 billion in the value of its investments from a month earlier.
“The volatility is just unreal this year,” Faison said.
The market volatility is not expected to affect Virginia’s budget, which includes the state’s share of contribution rates to pay for state employee and teacher pension benefits.
The VRS Board of Trustees set the current rates last fall for this fiscal year and the next and lowered the retirement system’s expected investment return from 7% to 6.75% per year over 30 years.
The lower long-term investment return will decrease the funded status of the five state pension plans VRS administers. The biggest is the teacher pension plan, with about 156,000 members, followed by the state employee plan, with almost 76,000 members.
VRS expected the funded status of the teacher plan to fall from 74.1% to 70.6% and the state employee plan from 75.% to 71.4%, which would increase the unfunded liabilities of the retirement system.
However, VRS based those estimates on a potential return of 1% in the fiscal year that ended last week, so the expected 2% return would slightly improve the funded status of both pension plans.
The system’s unfunded liabilities — $13.1 billion for the teachers plan and $6.5 billion for the state employees plan a year ago — stemmed from market losses in the Great Recession and chronic state underfunding of the retirement contributions that VRS determines are necessary for the system to pay its long-term pension obligations.
Pension reforms and increased funding in the state budget have helped reduce those unfunded liabilities. “We’re gratified by the demonstrated commitment to funding the contribution rates,” VRS Director Trish Bishop told legislators on the commission.
Secretary of Finance Aubrey Layne, who was briefed by VRS officials on Monday afternoon, said the Northam administration supports the retirement system’s decision to lower its long-term investment return expectation, even though it required the state to increase its funding in the two-year budget the assembly adopted on March 12.
“We should not back off,” Layne said in an interview on Monday.
Northam plans to call the General Assembly into special session in late August or September to revise the budget in the face of a revenue shortfall now expected to be about $500 million in the fiscal year that just ended. The governor plans to announce a revised revenue forecast for the budget on Aug. 18.