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The Mark of Kaine

$22B budget and pension deficit could hurt Tim Kaine’s Senate chances

July 10, 2012

Former Virginia Gov. Tim Kaine left the state with a $22 billion deficit when he departed office in 2010, according to a Washington Free Beacon analysis.

Kaine, who is running against former Sen. George Allen for one of Virginia’s U.S. Senate seats, steered the state through the 2008 crash while attempting to increase spending by $1 billion.

The economic crash left the state with a $1.8 billion deficit in 2010, and a projected budget deficit of $4.2 billion for fiscal years 2011 and 2012.

That is only a slice of Virginia’s debt picture moving forward, however.

The economic collapse also exacerbated the state’s pension woes. The Virginia Retirement System, which funds retirement costs for state employees, was $20 billion short of meeting its future retirement costs in 2010, up from $10 billion when Kaine took office.

"Pension liabilities—that is, the future benefits owed to public employees—are effectively government debt, since these benefits are virtually guaranteed and have to be paid pretty much regardless of the state's budget situation," said Andrew Biggs, a former Social Security commissioner and resident scholar at the American Enterprise Institute. "An increase in the VRS's unfunded liabilities is equivalent to rising state debt, which will require higher taxes on present and future taxpayers."

The inherited debt from 2010 is already costing Virginia taxpayers billions. Gov. Bob McDonnell proposed a $2.2 billion employer contribution to the system over the next two years, the largest contribution in history.

"The amount of money that we needed to put in has diminished ever since 2001 and is constantly going down and taking the fund under water," said Republican State Sen. John Watkins. "We just got serious about paying for this, but it’s going to take 20 years to make back."

"It’s not all [Kaine’s] fault—the legislature played a role, too—but the buck stops with him as governor."

Each year state accountants estimate how much money is needed to bring pension funds to full funding, but it is up to lawmakers to authorize the contribution. Under Kaine, the state fell well short of those goals. He contributed $990 million to the pension system in 2010, about 66 percent of the $1.5 billion required contribution.

The Virginia system has been in free fall since reaching over 100 percent funding in 2001, as lawmakers failed to make adequate contributions and investment returns fell short of expectations.

The lax contributions are a reflection of misplaced priorities from lawmakers, according to Frank Keegan editor of the fiscal watchdog State Budget Solutions.

"In good times these guys don’t put enough money away, then the bad economy comes and they contribute even less. We’ve seen it in every state in the country," he said. "Eventually VRS is going to run out of money to pay benefits. They will either have to increase taxes massively … or they’re going to have to cut benefits. Someone has to take the hit."

Kaine has blasted Allen, who served in the Republican-controlled Senate when the federal government fell into deficit in the wake of the 2001 recession, World Trade Center and Pentagon attacks, and expansion of federal spending under the Bush administration.

"He turned, and his colleagues in the majority in the Senate turned, the biggest surplus in the history of the United States into the biggest deficit in the history of the United States," Kaine said in a December 2011 debate with Allen.

A pro-Kaine Super PAC jumped on the issue, releasing an ad that faulted Allen for "bipartisan" actions in Congress that produced the federal deficit. Factcheck.org said Allen "helped" his colleagues spend the surplus, but concluded that the PAC "distorts" the Republican’s record.

Allen’s record as a worthy budget steward in the state Governor’s Mansion could give him a boost. The VRS’s funding ratio rose from 73 percent when he took office in 1994 to 88 percent in 1998—though he also failed to make the required contributions to the system, including a 62 percent contribution in 1997. The pension-funding gap decreased by $2 billion during his term.

Allen cut taxes by $600 million while in office and left Virginia with a $175 million surplus, contributing $78 million to Virginia’s rainy day fund. Those funds came in handy in 2007 when Kaine raided the pension fund of $300 million to overcome a budget deficit.

"Allen was an excellent steward in that situation because it might have been mighty tempting and mighty easy to use more of that money for pet projects," State Sen. Watkins said. "It’s the kind of stewardship we need at the state and national level."

Biggs says that economic stewardship, especially regarding entitlement issues, such as retirement benefits, will be a major theme as November approaches.

"While the budget is suffering today because of the recession and expanded government spending, pretty much the whole long-term deficit picture is due to entitlements," he said. "Without rising costs for Social Security, Medicare, and Medicaid, the federal budget would basically be in balance over the long term. So unless Congress addresses entitlements, the deficit simply won't get fixed."

Neither Kaine nor Allen returned calls for comment.