May 25, 2011

Proposal for pension funding change draws criticism

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By Len Lazarick
Len@MarylandReporter.com

Pen and calculator.A proposal to change the funding method for state pensions that will reduce state contributions to the system and delay reducing the state’s unfunded liabilities was criticized by two private sector representatives on the special commission studying retirement benefits.

“The pension plan will never get to 100% funding,” said George Roche, former chairman and president of mutual fund giant T. Rowe Price, at a hearing Monday. “The workers are really exposed to a lot of risk and I don’t like it.”

The plan presented by Dean Kenderdine, executive director of the Maryland State Retirement and Pension System, and the system’s actuaries would replace the current “corridor” funding method with a plan that spreads the pension liability over a rolling 20-year period.

The new plan, approved by the system’s Board of Trustees, would initially cost the state $500 million more over the next six years, but eventually would reduce state costs $18 billion over the following 16 years.

“It’s not sound in the private sector, and it shouldn’t be for the state,” Roche said, who called the proposal “some gimmick.”

Aris Mardirossian, founder of Technology Patents of Gaithersburg and also a member of the Public Employees’ and Retirees’ Benefits Sustainability Commission, said the state has “a fiduciary responsibility” to fund the employee pensions. “Why aren’t we funding what we promised?” Mardirossian asked.

Brian Murphy of Gabriel Roeder Smith & Co., the system’s actuaries, said, “I would disagree that it’s a gimmick or it’s not sound funding.”

Murphy said the proposal establishes contribution rates from the state that were “sustainable” and not the “unrealistic amounts” that would be demanded in a few years if no changes were made.

“If the state has sufficient funds, we’ll be glad to take your money,” Murphy said, adding but “I don’t see those billions” materializing in the distant future.

In fiscal 2012 starting July 1, state taxpayers will set aside $1.4 billion to pay for pensions for public school teachers and state employers. Under the old method that would rise to nearly $3 billion in 10 years. Under the proposed plan, the figure would rise to $2.3 billion.

Currently state pension liabilities are about 60% funded; the pension fund is short $18 billion in future obligations it owes. Under the proposal, the pension system would only reach 80% funding in 2025, two years later than is forecast based on the increases in employee contributions passed by the General Assembly this year.

State Treasurer Nancy Kopp, who is both a member of the pension commission and the chairman of the retirement ystem’s trustees, insisted that the state system was different from the private sector.

Fred Homan, Baltimore County’s administrative officer who serves on the commission, said the panel needed to keep in mind that the state has other obligations to pay for and “80% funding does not create a cash problem” in paying out pension checks.

After the meeting, Mardirossian said, “we just passed the buck. We didn’t solve our problems.”

The pension commission is due to make its final report by July 1.