December 14, 2010

Pension commission delays decisions – but is told it can’t reduce COLAs

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By Len Lazarick
Len@MarylandReporter.com

The commission examining changes to state retirement benefits put off any decisions until at least next week, but staff on Monday told the members that they couldn’t alter employee cost-of-living adjustments (COLAs) – one of the largest areas for potential savings.

Freezing or capping COLAs for current and future retirees for five to 15 years was one scenario suggested to the Public Employees’ and Retirees’ Benefit Sustainability Commission. But Michael Rubinstein, a legislative analyst staffing the commission, told the commission that “simply from a legal question that approach is not viable.”

Both the assistant attorney general for the State Retirement and Pension System and the general counsel to the General Assembly said, “You cannot change the COLAs for current retirees” or for those active workers who had already earned benefits, Rubinstein said.

Like Social Security beneficiaries, state retirees did not see increases in their pension checks this year because the cost of living did not go up.

There seemed to be growing consensus on the eight-member commission that health benefits for current workers and retirees need to be changed. The state has an unfunded liability of $15 billion in promises for health care it has made over the next 30 years, and it has put aside only about 2% of that.

“There’s no question that Maryland needs to come more in line with other states,” said former state Sen. Barbara Hoffman.

State treasurer Nancy Kopp said, “I sense there is a consensus that health benefits ought to resemble other states.”

These changes in plan coverage would lower the costs to the state by 10% or about $100 million a year and raise the costs to employees, according to the “Decision Guide” the commissioners were given. But Warren Deschenaux, the legislature’s fiscal policy chief, told them such changes “would have to be brought to the bargaining table” with the state employee unions.

Depending on how they use medical care, the changes could cost employees and retirees anywhere from $400 a year to thousands of dollars.

By far the biggest long term savings for health care would be to shift all Medicare-eligible retirees to Medicare Part D to cover the cost of prescription benefits. In the long run, that could save the state $5.5 billion over the next 25 years,  or about $420 million a year.

None of the changes in pension or health care benefits would save any money for next year’s fiscal 2012 budget, for which a $1.8 billion deficit is projected.

Commission member Aris Mardirossian questioned the fairness of trying to cut employee benefits when the underfunding of the state pension system was caused by the reduction in contributions to the pension system, and “the failure of the investment strategy” during the last two recessions.

The panel also reviewed several scenarios for shifting some of the costs of teacher pensions back to the counties.