January 4, 2010

Analysis: Employee retirement costs loom in 2010

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By Len Lazarick
Len@MarylandReporter.com

The new year starts, as usual, with unfinished business for state government.

By now, Gov. Martin O’Malley has likely decided how to balance the fiscal 2011 budget. The five-volume, 3,000-page spending plan is heading to the printer. We’ll find out in about two weeks how he plans to fill the $2 billion projected deficit.

Those decisions on how to keep agencies and programs running almost certainly will not include any solution to Maryland’s long-term financial liabilities – largely pensions and retiree health benefits.

In November, we reported that taxpayer funding of the state pension system would have to go up $189 million in the coming year, from $1.2 billion to $1.4 billion. This comes after two straight years of investment losses.

The stock market has had made a good recovery, but over the next 30 years, the state has promised employees pensions that will cost $17 billion more than it has put aside.

Just six years ago, due to a run-up in stocks, Maryland’s retirement system had 90 percent of the money it needed to cover its long term liability. That high level of coverage allowed the state to reduce its contributions over the next five years.

The state’s funding ratio — which measures how much the state has put aside compared to its estimated liability — was at 78 percent last year and it has now fallen to 65 percent. Legislative analyst Michael Rubenstein, in a report for the upcoming session, projected “the funding ratio will continue to approach 50 percent” and “the state will face a significant fiscal challenge to pay for retiree costs in the years ahead.” (Page 46)

The state’s commitment to pay the entire cost of teacher pensions represents nearly two-thirds of the annual contribution from taxpayer funds, or $919 million next year.

To catch up with rising liabilities for the future and to get back to where it was in 2003, the state would need to put in another $500 million each year. That’s money Maryland doesn’t have and is not likely to get from taxpayers in the next few years.

The same goes for the cost of health insurance for retirees. As we reported last week, Maryland would need to add more than 25 percent to its overall payroll cost if it is to catch up to its commitment to provide its retirees with health care, according to a report from the Center for State and Local Government Excellence.

Maryland’s liability of about $14.5 billion for retiree health care would require a $1.1 billion annual payment if the state were to fund the program in full.

Health insurance is the fastest-rising fringe benefit for state employees, legislative analysts have said. But a special blue ribbon commission set up two years ago to come with a solution is going to make no recommendations this year while lawmakers wait to see what comes out of health care legislation in Congress.

Solutions proposed by the legislative staff early last year involved either some reduction in health insurance benefits or increases in premiums for employees and retirees. State employee unions immediately jumped on the proposals, and no more has been heard of them since.

Pensions with defined benefits based on past earnings and generous health insurance for the retired are two benefits that have gradually disappeared from the private sector, except in unionized companies. State and local employees are not likely to give up these benefits without a major fight.

The governor and legislature face two more immediately pressing problems this year. They need to balance a state budget with flat revenues and the loss of federal stimulus dollars at the end of the year. They also need to get re-elected, and are not anxious to pick a fight with the largest unions in the state – those representing teachers and state employees.