State Pensions or: How Conservatives Learned to Stop Worrying and Love Borrowing

By Matthew Cameron

Amid relentlessly depressing news about the national economy and the federal debt situation, The Washington Post reported a rare bit of positive-sounding information this morning:

Gov. Bob McDonnell will announce Tuesday that Virginia ended the fiscal year on June 30 with a surplus of $311 million, according to the governor’s office.

McDonnell (R) will outline how he will spend the surplus in a news conference on Capitol Square, though most of the money is already accounted for — including funding for roads, education and the Water Quality Improvement Fund, which is used for the Chesapeake Bay cleanup.

This is the second year Virginia has had a budget surplus after three years of revenue shortfalls when the state had to cut billions from the budget. Last year, Virginia ended the fiscal year with a surplus of about $403.2 million — almost twice the previous estimate.

Before everyone packs their bags and moves to Virginia, however, it’s worth looking into this situation more closely. Did the state achieve it’s sterling fiscal situation through a balanced package of spending cuts and tax increases? Did it enact a stringent austerity budget along the lines of the Cut, Cap and Balance Act that was up for debate in Congress today?

No on both counts. Instead, let’s flashback to a Richmond Times-Dispatch article from last year detailing the state’s plan for balancing its budget:

Virginia is taking away more than $620 million that would have been paid toward state employee and teacher pensions, but the state is leaving an IOU.

Beginning in 2013, the state will have to repay the money to the Virginia Retirement System over 10 years, with 7.5 percent interest.[…]

Sen. Walter A. Stosch, R-Henrico, called the provision the most important step taken by the assembly to protect the retirement system, even as it relies on deferred pension contributions for almost one-fourth of the money used to balance the two-year budget.

That’s right, Virginia “balanced” its budget and set up this year’s surplus by borrowing money from itself. Coming on top of $17.6 billion worth of unfunded pension liabilities, that would have been a rather audacious move for any governor to approve. But that’s especially so for McDonnell, who is among the leading vice presidential candidates for a party that presently is waging a total war against increasing the federal government’s borrowing authority.

Of course, McDonnell isn’t the only conservative who has embraced these accounting gimmicks. The Virginia House of Delegates, which has a solid Republican majority, also voted for the plan. And this Pew report showed that a number of conservative-led states were guilty of underfunding their pension obligations in 2010, including those of GOP governors-turned-presidential hopefuls Tim Pawlenty and Rick Perry.