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Can the General Assembly change my retirement benefits?

I hear the legislature is considering making changes to my pension in the Virginia Retirement System. Who would be affected by any changes?

If you are already retired and receiving your Virginia Retirement System (VRS) benefits, VEA and VRS consider your benefit irrevocable and not subject to change. But if you are not retired, you could be affected by prospective changes to the VRS.
Unlike pension plans held by private employers, the VRS and other government retirement systems are not covered by the requirements and restrictions of the federal Employment Retirement Income Security Act (ERISA) or the guarantees of the Pension Benefit Guarantee Corporation (PBGC).

The Contracts Clause of the U.S. Constitution restricts the state legislature from changing an obligation of contract. But there are not many court cases that address what provisions of a public retirement plan are obligations of contract, and perhaps more important, when provisions of a public retirement plan become contractual obligations.

Once you retire, you enter a contract for benefits on the terms then in effect. But until you retire you may have a promise of the terms you will enjoy on retirement rather than a binding contract. Think of a reward for the capture and conviction of a criminal. The reward is an “offer” that does not create a contract until someone accepts by meeting all the terms including capture, delivery, and conviction of the criminal. In similar fashion, the promise of pension benefit may not be a binding contract until you meet service requirements and retire. If you don’t have a contract, the benefits you’ve been promised can be changed.

When the VRS executive director briefed legislators in November 2009, he suggested that courts would accept prospective changes not affecting benefits earned before the date of the change. What aspects of the VRS plan can change prospectively? At an extreme, the plan could be “frozen,” with new employees going into some other retirement system. VEA worries that the financial well being of the “frozen plan” is weakened if new employees are not participating, and that new employees will not have a strong retirement system.

Less drastically, new employees could remain in the plan with changes such as a longer period before vesting, changes in the age or service level for reduced and unreduced early retirement, or changes in the elements of the retirement allowance calculation (multiplier, definitions of creditable service, creditable compensation, average compensation). VRS would be faced with administering a complex system with different rules and trigger dates. School employees would receive different benefits depending on when they worked in a school and when they retired.

VRS calculates and pays a cost-of-living adjustment (COLA) to retirement benefits. It is not clear whether a prospective change in the COLA formula or cap could apply to all those retiring after the date of the change, or whether VRS would have to calculate benefits earned before the change one way and apply the new rules only to benefits earned after that date.

Contribution requirements and interest and contribution rates are determined by the General Assembly and can be changed prospectively for all VRS members.

VEA has a long history of winning fair retirement benefits for public educators. But those victories didn’t come easily and could be undone if VEA members do not step up to defend them.


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