Pension commission wraps up, recommends look at COLAs, cost shift to counties

July 08, 2011 at 5:39 am

By Len Lazarick
Len@MarylandReporter.com

State House with iconic dome shrouded by drop cloths for $500,000 repainting.

State House with iconic dome shrouded by drop cloths for $500,000 repainting.

The special state pensions commission wrapped up its work Thursday, recommending more possible changes in public employee retirement benefits. These included shifting half the cost of teacher pensions to local school systems and asking the attorney general to take a hard look at the legality of reducing cost-of-living adjustments for current retirees.

The seven-member Public Employees’ and Retirees’ Benefit Sustainability Commission stepped back from a flat assertion in its draft report that the changes made by the governor and legislature in April “may not have gone far enough.”

Those changes increased contributions from employees to maintain current benefits, and reduced benefits for new employees.

But member George Roche, the former chairman and CEO of the huge T. Rowe Price mutual fund group, asserted that “this commission hasn’t really done anything. …We’ve kicked the can down the road, or kicked it into somebody else’s yard.”

Roche did vote for the final commission report, despite his unhappiness.

Other commissioners rejected Roche’s characterization. Lobbyist Barbara Hoffman, the former chair of the Senate Budget and Taxation Committee, said the commission had actually done a lot by providing “a road map” for future retirement changes.

Representatives of the two largest public employee unions were unhappy with the report in other ways, especially since they had no chance to review or comment on it before it was adopted.

Sue Esty, deputy director of the Maryland branch of the American Federation of State County and Municipal Employees, said the commission needed to take state workers more into account, and they should have been represented on the commission.

The changes already approved by the legislature, which did not go as far as the commission recommended in December, “shift the [pension] costs from the state to its employees” and “there is already a very significant increase in drug costs.”

“There already is a problem with recruitment and retention” of workers for state government, Esty said, and the commission’s recommendations to increase worker contributions and reduce benefits have made it worse.

Ditto, said Sean Johnson, representing the Maryland State Education Association. Johnson said the commission and the legislature had effectively reduced the value of pensions by making employees contribute more – up from 5% to 7% — and ultimately reducing the state’s share.
Johnson said shifting the cost of teacher pensions to local boards “makes it a further cut in local education aid.”

In other recommendations, the commission reinforced its earlier advice that the state have a plan to integrate its prescription benefits with Medicare Part D by 2020 — even though “we don’t know what Medicare Part D is going to look like in 2020,” Hoffman said. This would shift the current state health costs onto the federal program for those over 65.

The commission also recommended that the state look at establishing a hybrid pension system for younger workers that combines the traditional defined benefit plan with a defined contribution plan like a 401(k).

The legislature created the commission to help solve the huge underfunding of retirement benefits. Maryland has funded only 64% of the pensions it has promised, leaving it with $19 billion to make up. On health benefits, it has funded just 1% of $16 billion in promises, but the legislature’s action in April reduced that liability.

Perhaps the longest discussion regarded the cost-of-living adjustments. Last week, Minnesota and Colorado courts threw out challenges to reductions made in retiree COLAs.

“My understanding is that our law is quite different than either of those other states,” said State Treasurer Nancy Kopp, a commission member. But that was based on various court cases; there has never been a formal opinion about it from the attorney general.

The legislature did reduce COLAs for future retirees, tying them to investment earnings. Commission member Fred Homan, Baltimore County administrative officer, said the same should be done for current retirees.

“This COLA provision is a killer financially,” Homan said. “I don’t believe that COLAs not tied to earnings are sustainable.”

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