Teacher pension trust fix would use millionaire, corporate taxes

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By Natalie Neumann

With the budget a huge headache this session, legislators are hoping they can balance it, keep it sustainable and pay for ongoing obligations.

Del. Roger Manno is proposing a bill he hopes could help do all three.

The bill by the Montgomery County Democrat would do three things: Set up a special teacher pension fund and put money into it by making permanent the millionaire tax due to expire this year and by making corporations use combined reporting to figure their tax liabilities.

Manno hopes the bill will ease the burden counties would face if the state gives up on some of its pension obligations.

Maryland’s pension and retirement programs for teachers and state employees receive funding by the “corridor funding method.” This method uses a fixed contribution rate as long as the funded status for each of these systems remains in a “corridor” of 90% to 110%. On his Web site, Manno wrote the corridor funding method “has ultimately resulted in Maryland’s two largest pension systems being severely underfunded.”

In their annual report last month, the retirement system’s trustees wrote they were “deeply concerned with the Corridor Funding Method” and stand by their recommendation “to cease use of this methodology.”

Manno’s bill would establish the Teacher Pension Sustainability and Solvency Trust Fund. The fund would offset the state’s cost in making employer contributions to the retirement fund.

Bob Rankin with the Maryland State Education Association said the teachers’ union also shares Manno’s concerns about the pension funding formula and shifting the cost of the pensions to the counties. However, “we have no position on [the bill] because of the way he’s [Manno] proposing to fund it,” said Rankin.

Combined reporting to calculate corporate income taxes has been a controversial issue for several years. Its advocates argue that the existing tax structure unfairly benefits large, multi-state corporations. Opponents say combined reporting is overly complicated and would not provide a significant benefit for the state.

A Business Tax Reform Commission is studying the issue but it is not due to make recommendations until the end of the year.

Ron Wineholt, vice president of government affairs for the Maryland Chamber of Commerce, said the millionaire tax and combined reporting would be a real problem for Maryland businesses.

“It would impose two taxes on business to pay for what are really excessive levels of public employee retirement benefits,” said Wineholt.

The millionaire tax — 6.25 percent on incomes over $1,000,000 — was passed in 2008 to replace an unpopular sales tax on computer services. Wineholt said legislators should stick to their promise to let it expire at the end of 2010.

“This is a tax that falls on small business owners and we need to let this expire,” said Wineholt.

Wineholt says the bill would make the state business unfriendly.

Rankin said historically the General Assembly has not favored dedicated trust funds. Legislators in the past have preferred to see revenue go into general funds.

Wineholt believes the bill won’t pass. However, Manno wrote on his Web site that if the bill passes it “is projected to return Maryland’s largest pension systems to full solvency by 2017 or 2018. Importantly, trust fund revenues will insulate counties from having to assume future pension obligations.”

The chamber and the teachers union agree the pension system needs to be revamped, but believe Manno’s three-part proposal isn’t the way to go.