Panel: Kaine’s revenue loss projections too modest

RICHMOND — Senators fretted over $2.5 billion in projected state revenue losses Thursday, then learned to their horror that the state public employee retirement system has lost $11 billion since June.

The stock market dive has shaved about 20 percent of the value off of Virginia Retirement System holdings that were worth $55 billion as of June 30, VRS executives told the Senate Finance Committee.

Nearly half of that slide has come since Sept. 30, when global markets began a nosedive in what VRS executive director Robert Schultze called a worldwide crisis of confidence.

The losses do not impair VRS’s ability to provide pensions for nearly 140,000 retired employees of state or local governments because long-term yields remain solid and the system’s cash flow remains healthy, Schultze said.

But the disclosure stunned the Senate panel, which had just finished an hourlong debate over whether Gov. Timothy M. Kaine’s estimated $2.5 billion two-year decline in state revenues was too modest considering wild volatility in worldwide financial markets and a lingering recession.

“We lost $5 billion in two weeks?” committee chairman Charles J. Colgan, eyes wide in disbelief, asked VRS chief investment officer Charles Grant.

“That’s right,” Grant calmly replied.

Grant said the VRS portfolio slid from $55 billion at the end of the 2008 fiscal year to $49.5 billion when the first quarter of the 2009 fiscal year closed in September. By Wednesday, he told the committee, he estimated the value of VRS holdings to be about $44 billion.

Besides government retirees, VRS serves about 345,000 current public-sector workers in state and local governments across Virginia.

The downturns are no immediate cause for alarm, Grant said. The system has endured periodic losses before and is built to take into account sharp but momentary fluctuations in markets, and it remains among the nation’s soundest. Because its cash position is solid, Grant said, VRS is not at risk of needing to liquidate any of its investments at their current low values to meet its payouts.

Partly in jest, Sen. Richard L. Saslaw, D-Fairfax County, asked Schultze and Grant why the VRS portfolio had taken such a hit and why VRS didn’t follow the lead of billionaire investor Warren Buffett.

Had the entire VRS fund been invested with Buffett’s firm, Berkshire Hathaway Inc., “it probably would be averaging about 20 [percent] to 22 percent [growth] a year,” Saslaw said.

“Y’all ever watch what that guy does?” he asked Grant as the committee chuckled. But Saslaw persisted: “The reason I say that is because he’s got a set of criteria, seven or eight things that if a company does not ... meet every one of those categories, he won’t invest in it.”

Grant said VRS pays attention to Buffett and Berkshire Hathaway, “but it wouldn’t be prudent to put all our money in Berkshire Hathaway.”

The discussion of the pension fund came after senators found themselves at odds over how short the state would actually fall of its budgeted revenue estimates, and whether Kaine was drawing too much from the state’s cash reserves and cutting too little in some areas.

Kaine last week announced cuts that included laying off 567 workers, shuttering six prisons, substituting debt for cash to pay for about $250 million in capital projects and drawing about $400 million from the state’s “rainy day” reserves to tide government over for the current fiscal year, now in only its fourth month.

Sen. Kenneth W. Stolle, R-Virginia Beach, said it appeared Kaine was drawing too much from the Revenue Stabilization Fund — the reserve’s formal name — “to maintain spending we can’t afford.”

He questioned the wisdom of Kaine’s decision to hold state aid to public kindergarten through 12th grade harmless for the current fiscal year because local school districts would be forced to rewrite budgets, cut faculty and staff and cancel programs in the middle of an academic year because of the unanticipated loss of state support.

Stolle said there seemed no such concern for state support to local governments largely for law enforcement, known in the state bureaucracy as “599 money.”

“I recognize that everybody places a high degree of importance on education, ... but the byproduct of that decision, which may ultimately be the decision we make, is that we’re cutting 599 money,” Stolle said. “They’ve hired people, they’ve assumed responsibilities and public safety’s going to have to make cuts.”

While public education gets a pass for the current year, there is no escaping cuts for fiscal 2010, senators and Kaine administration Finance Secretary Ric Brown agreed.

“If there is any of the education and local governments that there’s going to be changes, reductions in K-12, they’re asleep behind the switch,” said Sen. R. Edward Houck, D-Spotsylvania, a public school administrator by profession who holds enormous sway over state education policy as chairman of the Senate Education and Health Committee.