1. Virginia Retirement System Update VACO Conference November 8, 2010 Robert P. Schultze Director

2. 2 Agenda  System Overview  Funding the Benefit  2010 Legislation  Upcoming Issues

3. System Overview

4. 4 VRS Overview  VRS is the 22 nd largest public or private pension system in the U.S.  There are almost 600,000 members, retirees and beneficiaries.

5. 5 VRS Total Membership Teachers147,817 Political Subdivisions104,385 State Employees78,613 State Police Officers’ Retirement System (SPORS)1,766 Judicial Retirement System (JRS)408 Virginia Law Officers’ Retirement System (VaLORS)9,620 Total Active Members342,609 Retirees/Beneficiaries148,496 Inactive/Deferred Members105,774 VRS Overall Impact596,879 As of June 30, 2010

6. 6 Active Members

7. 7 Retirees

8. 8 July Retirements by Fiscal Year

9. Benefit Comparison State 1 Teachers 1 Local 2 Actives: Average Age47.8945.0245.5 Average Service12.9111.6510.3 Average Salary$46,222$47,958$39,348 Retirees: Avg. Age @ Retirement60.6459.2561.1 Avg. Service @ Retirement24.61 19.5 Avg. Benefit @ Retirement41.84% 33.3% Avg. Benefit$17,023$20,814$13,791 9 1 – Indicates information from the 2010 actuarial valuation. 2 – Indicates information from 2009 actuarial valuation.

10. Funding the Benefit

11. 11 Funding VRS Benefits How is the VRS benefit funded:  68% of benefit costs funded by investment earnings  32% of benefit costs funded by employee/employer contributions

12. VRS Fiscal Year Returns 12 14.1%

13. 13 Net Assets Available for Benefits

14. 14 Funded Status What is meant by funded status:  Compares assets available to pay benefits with present value of future liabilities  Asset/liability ratio is typical measure  Percentage of assets available to pay present value of all future liabilities (until the last member of the plan dies)

15. 15 Funded Status: Teachers

16. 16 Funded Status: Local Governments 2009 Aggregate Funded Ratio – 570 Plans Note: 2009 average funded ratio of 570 plans = 94.5%

17. 17 Contribution Rates  2010 - Eliminates employer contributions to VRS in the last five pay periods of Fiscal Year 2010. VRS estimates the rate holiday will reduce contributions to VRS from about $2.4 billion in FY 2010 to about $2.1 billion.  2011-2012 – Contribution rates for the pension programs and OPEBs funded by the General Assembly are provided in the following charts.  2012 – 2014 - In setting the employer retirement contribution rates in subsequent biennia, the Board shall calculate a separate, supplemental employer contribution rate that will amortize the FY 2011 and 2012 contribution shortfalls over a 10-year period using the Board's assumed long-term rate of return. The Governor shall include funds to support payment of such Board-approved, supplemental employer contribution rates in the budget submitted to the General Assembly.

18. Retirement Contribution Rates Rates* FY 2010 2009 Board Certified Rates FY 2010-12* Appropriations Act 2010-2011 Appropriations Act 2011-2012 2010 Interim Valuation Results State Employee 11.26%13.46%7.13%7.08%18.29% Teacher 13.81%17.91%8.93%10.16%22.41% Locals**13.00% n/a Locals w/o Haz. Duty** 11.90% n/a Locals with Haz. Duty** 15.0% n/a *Current FY 2010 rates are based on assumptions applied in the 2009 Appropriations Act (8% rate of return, 3% inflation rate, and a 30-year amortization). Board certified rates are based on the following assumptions (7.5% rate of return, 2.5% inflation rate, and a 20-year amortization period). These rates do not reflect the suspension of payments in the 4 th quarter. ** Average rate for localities. Contribution rates include the 5% member contributions.

19. 19 Teacher Contribution Rates FY ‘84 – ‘14 Above rates include the 5% member contributions paid by employers. Assumes 7.00% rate of return and 2.50% inflation rate.

20. 20 Local Government Contribution Rates (Averaged) Above rates include the 5% member contributions paid by employers. Assumes 7.00% rate of return and 2.50% inflation rate.

21. 2010 Legislation

22. HB 1189/SB 232  Creates new plan design provisions (Plan 2) for state, teachers and local government employees hired on or after July 1, 2010  Creates a new plan (Plan 2) for Optional Retirement Plan (ORP) members hired on or after July 1, 2010.  Does not affect current members or current retirees, who are under Plan 1. Members who left employment and did not take a refund are deferred members and remain in Plan 1. 22

23. 23 2010 Legislation VRS Plan 1VRS Plan 2 Average Final Compensation Average of 36 highest consecutive months of creditable compensation Average of 60 highest consecutive months of creditable compensation Member Contributions (DB Plan) Employee or employer contributes 5% employee contribution State employees contribute 5% on pre- tax salary reduction basis. Schools/political subdivisions employees may contribute some or all of the 5%, depending upon the election by the employer Member Contributions (ORP Plan) 10.4% employer contribution8.5% employer contribution and 5% member contribution on a pre-tax basis. Higher education may increase the employer contribution to 8.9% provided it is paid with non-state funds. Normal Retirement Age Age 65Social Security Normal Retirement Age SPORS, ValORS and political subdivision hazardous duty: Age 60 Same as Plan 1

24. 24 2010 Legislation VRS Plan 1VRS Plan 2 Retirement Multiplier VRS: 1.7% SPORS: 1.85% VaLORS: 1.7% or 2.0% Sheriffs: 1.85% Political subdivision hazardous duty: 1.7% or 1.85%, depending upon election Same. Unreduced Retirement VRS: Age 65 with at least 5 years of service or age 50 with at least 30 years of service VRS: Normal Social Security retirement age with at least five years of service credit or when age and service equal 90 SPORS, VaLORS, political subdivision hazardous duty: Age 60 with at least five years of service or age 50 with at least 25 years of service Same. JRS: Age 65 with weighted service equal to at least 5 years of service or age 60 with weighted service equal to at least 30 years of service Same.

25. 25 2010 Legislation VRS Plan 1VRS Plan 2 Reduced Retirement VRS: Age 55 with at least 5 years of service or age 50 with at least 10 years of service VRS: Age 60 with at least five years of service SPORS, VaLORS, political subdivision hazardous duty: Age 50 with at least five years of service Same. JRS: Age 55 with weighted service equal to at least 5 years of service Same. COLA Matches first 3 percent increase in the Consumer Price Index-Urban and one- half of the remaining increase up to a maximum COLA of 5 percent, when provided Matches first 2 percent increase in the Consumer Price Index-Urban and one-half of the remaining increase up to a maximum COLA of 6 percent, when provided

26. 26 2010 Legislation Employer Paying 5% Plan 1 Plan 2 Employee Paying 5% Plan 2 Employee Paying a Share of the 5% Schools14471 Municipals223648 Authorities/ Commissions 181491 Total54812010

27. Proposed Savings From Pension Reform (Teachers) 27 Above chart assumes all Plan 2 members pay the 5% member contribution.

28. Line of Duty Act  The Line of Duty Act (LODA) Fund can be found in Item 258 of the Budget Bill; imposes annual contributions upon state and local agencies, beginning July 1, 2011.  LODA provides health insurance and death benefits for hazardous duty employees and volunteers and their families upon death or disability in the line of duty.  A new LODA Fund comes under VRS’ investment management. Contributions will be made by state and localities.  Contribution rates will be calculated by VRS Board of Trustees in mid-December.  Localities may opt out and provide for separate financing.

29. Upcoming Issues

30. Pending Changes in Pension Accounting Rules  GASB has issued “preliminary views”  Final rules to be issued in two years  Changes affecting local governments and school boards: 1.Pension liabilities/expenses go from footnotes to balance sheet 2.Pension assets would be marked to market causing significant volatility in annual reporting 3.Cost-sharing pension plans (VRS Teacher Plan) must allocate liabilities proportionally to each employer 30

31. Thank you!