VSBA and VASS have been receiving a number of questions regarding the VRS legislation adopted by the General Assembly last Saturday. While the information below may not answer all of your questions, we hope that it will be helpful to you.
Q: What is the employer contribution rate and how was it calculated?
A: The employer contribution rate for the fiscal years beginning July 1, 2012 and 2013 will be 11.66%. The VRS board set an employer contribution rate of 16.77%. The conference substitute for SB 498 provides that school boards only have to pay 69.53% of the VRS board-established rate, or 11.66%, for the fiscal years beginning on July 1 of 2012 and 2013. Here is a link to the entire bill: http://leg1.state.va.us/cgi-bin/legp504.exe?121+ful+SB498ER.
Q: Is there an employee contribution rate in addition to the employer rate of 11.66%?
A: Yes, there is an employee contribution rate of 5%. However, there are discussions about increasing this rate to 6%.
Q: Must school boards require their employees to pay the 5% employee contribution rate?
A: Yes, school boards are required by SB 497 to make their employees pay the 5% employee contribution, although the bill gives school boards the option of phasing-in this requirement over a five year period with at least 1% being paid by the employees each year. The requirement for employees to pay the employee contribution becomes effective on July 1, 2012, for all new and existing employees.
Q: Must the school board provide an increase in compensation to employees to offset the employee contribution to VRS?
A: Yes, for certain employees. The school board must increase the creditable compensation for persons employed by the school board as of June 30, 2012, for whom the school board had been paying the employee contribution. The increase in creditable compensation must equal the amount of the contribution the employees are required to pay VRS. For example, if the school board had been picking up the employee contribution for all persons employed as of June 30, 2012, and the school board elects to require those employees to pick up the entire 5% employee contribution effective July 1, 2012, the school board must increase the creditable compensation of those employees by 5%. If the school board elects to phase-in the requirement on those employees, the school board must give those employees an increase in creditable compensation equal to the phase-in amount.
Q: What is "creditable compensation?"
A: In the last few years VRS has interpreted creditable compensation to be salary and payments to employees treated by the school board as part of the contracted salary. For example, if the employee is given a car allowance and the employment agreement with the employee specifies that the allowance will be considered salary for IRS and VRS purposes (e.g. reported as income on the employee's W-2), VRS has been willing to treat the allowance as creditable compensation. It would be wise to check the VRS Employer's Manual regarding what can and cannot be counted towards creditable compensation and to get approval from VRS if you are contemplating matching the employee contribution with anything other than an increase in salary. (Please recall that the law was recently changed to make employer potentially liable to VRS for incorrect retirement payments based on the erroneous reporting of creditable compensation by employers.) Also, please remember that the actual costs to the school board of increasing creditable compensation/salary will be greater than 5% because of the additional fixed costs, e.g. FICA and increased employer contributions.
Q: Is the school board required to give a salary increase to employees who were paying the member contribution before June 30, 2012, or who are hired (or rehired) on and after July 1, 2012.
A: No, it is not required, although a school board may elect to do so. Obviously, if salaries are not adjusted for new employees, you may end up with a two-tiered salary schedule which may cause practical, but not legal, problems.
Q: Did the VRS bills approved by the General Assembly make other changes that are not discussed above or in the previous Alert?
A: Yes, the bills changed certain benefits, e.g. COLA increases, for certain employees and they mandate that employees hired on and after January 1, 2014, who are not members of the current defined benefit plan must belong to a "hybrid" plan. Because these changes do not directly effect the budgeting process, we have elected not to address them in this Alert. If you would like more information on the changes in benefits, we encourage you to read the full text of SB 498 as passed by the General Assembly, which can be accessed through the link set forth above.
Q: Are Senate Bills 497 and 498 as adopted by the General Assembly on March 10 the final word on the changes to VRS?
A: Probably not. It is anticipated that the Governor will present amendments to the bills to be considered by the General Assembly at the reconvened session scheduled for April 18. VSBA and VASS will be encouraging the Governor to send down amendments to make both the member contribution and the increased creditable compensation requirements optional with school boards. In addition, the budget for the 2012-2014 biennium has not been adopted. That budget may very well address some issues relating to VRS. In this regard, it is important to remember that the budget has the force and effect of law, is effective immediately upon being signed by the Governor, and takes precedence over any inconsistent provisions in the Code of Virginia. The General Assembly will hold a special session to deal with the budget. The General Assembly is scheduled to convene for that special session on March 21. It goes without saying that each and every school board member and superintendent should encourage their Delegates and Senators to pass a budget as quickly as possible to remove the current uncertainty hanging over the local budgetary process.