By Seth McLaughlin

Gov. Robert F. McDonnell yesterday defended the decision to defer millions in payments to the state retirement system, and to spend a chunk of Virginia’s projected $220 million surplus on one-time bonus checks for state workers.

The Republican governor said that $140 million of the estimated surplus from the budget that ended June 30 was statutorily or constitutionally mandated earmarked for public education, transportation projects and the water quality fund for Chesapeake Bay and other cleanup efforts. The remaining $80 million would cover the cost of cutting one-time 3 percent bonus checks for all state employees.

“I’d called it incentive pay or a cost-of-living adjustment, or a bonus,” McDonnell said. “Whatever you want to call it, is appropriate for our employees that have done a good job.”

The concern over the best way to spend the the state’s surplus resurfaced yesterday after a caller asked McDonnell during his monthly appearance on WVRA radio in Richmond why the projected surplus was not being used to make up for millions of dollars in deferred payments to the Virginia Retirement System (VRS), the $50 billion fund that covers roughly 600,000 teachers and public employees.

In response, McDonnell said the projected surplus was primarily the result of larger than expected collections of individual and corporate income taxes and reduced spending through June 30.

He did not mention that the state deferred nearly $140 million in fourth quarter payments to the VRS, and picked up an additional $227 million from from accelerating its sales tax payment schedule for retailers, requiring them to remit collections two weeks early.

McDonnell has previously noted that the General Assembly adopted the accelerated sales tax under his predecessor, Democrat Tim Kaine, in 2009.

Going forward, McDonnell told listeners that the state decided to defer about $650 million in VRS payments in the new budget to help close a projected $4.2 billion budget shortfall.

“We will pay that back over ten years at about $65 million a year,” he promised.

McDonnell’s term ends in 2013.

Many states across the country have borrowed from their pension funds to help cover budget shortfalls. To reduce the future cost of supporting the system, Virginia lawmakers this year tweaked parts of the system. Among other things, they required state employees to contribute five percent of their compensation, and increased the number of months used to calculate average final compensation from 36 to 60.

Yesterday, McDonnell said he had met with VRS officials and is “very concerned” that the state makes sure the system remains financial sound. 

“Unfunded liabilities in the pensions are hurting a lot of other states,” he said. “I’m not going to let that happen in Virginia, so we will get that paid back. But I think people ought to be happy about the fact that for the first time in three years we are actually tracking with a surplus, that we have made significant cuts and the economy is about to return a little bit."