February 21, 2010

Maryland’s bright credit rating has a darker underside

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By Len Lazarick
Len@MarylandReporter.com

Maryland retained its near-sacred triple-A bond rating from the three rating New York City rating agencies Thursday.  The State House press corps generally treated it with a shrug, despite the pleadings for coverage.

No one, after all, had expected the rating houses to downgrade Maryland’s bonds, as they have in a few other states. A downgrade after 40 years as one of only seven top-rated states would have been huge news.

But underneath the good news this week was the troubling undercurrent of continuing budget deficits in coming years and the mounting deficit in state pensions and retiree health benefits. Neither problem is likely to be addressed during this election year

Two of the three rating agencies mentioned both problems, and raters had raised both subjects in the agency conference calls two weeks ago, Patricia Konrad, the head of debt management for the treasurer’s office, told a Senate committee.

Maryland’s good credit rating rests on four factors, according to Standard & Poor’s: a broad-based economy that has historically outperformed the national averages; high wealth and income; prudent fiscal management; and low debt, including a constitutional requirement that all bonds must mature in 15 years or less.

But S&P’s report cited both the continuing “structural imbalance” and the state’s “unfunded pension liability,” caused by both investment losses and “the lack of fully funding the annual required contribution.”

“If not addressed this would likely result in the continued weakening of the state’s pension system,” wrote S&P analysts Richard Marino and Robin Prunty.

The Pew Center for the States highlighted the problem on a national scale last week with a report called “Promises with a Price.” It details the trillion-dollar gap between what states have promised their retired employees and what the governments have stashed away for those benefits. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/pension_report.pdf

The Pew study is actually rosier than current conditions warrant, since it used 2006 figures, not those from 2009. In 2006, the future payments for retiree health benefits in Maryland was about $14.5 billion.

At that time, Maryland was one of 15 states where the cost of promised health benefits actually exceeded pensions liabilities, then about $7.6 billion. In three years, the situation has grown much worse.

Maryland’s pension liabilities are now at $17.5 billion, according to the state’s audited Comprehensive Annual Financial Report that came out last month. Retiree health benefits are now over $15 billion (p. 103). http://www.comp.state.md.us/finances/revenue/reports/cafr/cafr2009.pdf

That’s a total liability over the next 25 years equal to the size of this year’s budget.

What are state officials — so proud of the triple-A bond rating — doing about that huge future bill? Pretty much nothing, this year at least, when revenues are down.

In 2006, the legislature created a “Blue Ribbon Commission to Study Retiree Health Care Funding Options.” It was supposed to come up with final recommendations in December 2009. Instead, the House and Senate chairs of the commission have introduced bills this session to extend the life of the commission two years and require a final report in 2011.

A year ago, the blue ribbon commission did get detailed recommendations about what Maryland could do to reduce future liabilities. In general, legislative staff proposed a combination of raising employee contributions, increasing co-payments and reducing benefits, such as drug coverage.

Public employee unions screamed about the proposals. The commission delayed action on any of them.

In the past two weeks, Republican legislators have proposed reducing legislative pensions. They currently get two-thirds of a current legislative salary after serving 22 years in the General Assembly.

House and Senate Democrats have refused to even vote on the proposals, which would save an estimated $750,000 year.

But on the issue of pensions, Republicans don’t have much more credibility than their Democratic colleagues. In 2006, an election year, Republicans unanimously joined the Democrats in approving a substantial increase in pensions for state employees and teachers throughout Maryland that was strongly advocated by the public employee unions. http://mlis.state.md.us/2006rs/billfile/hb1737.htm

At the time, a fiscal analyst estimated that this pension boost – which also raised employee contributions – increased pension liabilities $1.9 billion over the next 25 years. In 2006, the state was flush with cash. Republican Gov. Bob Ehrlich signed the bill.

As the Pew Center study says in its executive summary: “In good times, feelings of legislative largess can create new retirement benefit policies that have costly long-term price tags.”

The long-term price tag for promises made by both Democrats and Republicans is $32 billion. Paying that off would cost at least another $1 billion a year that the state doesn’t have at the moment. Someday that money will have to be paid, or future benefits reduced. A triple A-bond rating doesn’t wipe this problem away.