By Len Lazarick
The state teachers union is rejecting most of the final recommendations of the special pension commission, particularly its proposal to shift half the funding of pensions onto county school boards or governments.
In a strong letter to the governor and legislative leaders, the union also wants county governments to be forced to fully fund school budgets and to give them authority to raise more taxes or disregard local tax caps.
On July 28, Clara Floyd, president of the 71,000-member Maryland State Education Association – the state’s largest union representing the majority of people covered by the retirement system – wrote a detailed letter to the governor and legislative leaders responding to the final report of Public Employees’ and Retirees’ Benefit Sustainability Commission.
The union rejects the assumption in the commission report that Gov. Martin O’Malley and the General Assembly did not go far enough this year in raising contributions rates and reducing future benefits. “Not only does the actuary data contradict this point, so do recent valuations of the pension fund and the state’s own budget estimates,” Floyd said.
The teachers union continues to object to moving some savings on pensions into the general fund in a few years for spending on other programs. It also aligns with local boards of education in seeking to bolster the maintenance of effort law that keeps county governments from cutting aid to education.
In exchange, the union favors giving counties more taxing authority, including an increase in the local piggy-back income tax rate to fund schools. They also want the legislature to override the kind of property tax caps that exist in Anne Arundel, Prince George’s and other counties that may limit the amount the counties spend on education.
The union also strongly opposes any effort to dilute the defined pension benefits with defined contribution plans like a 401(k), and they don’t want the attorney general to issue an opinion that says it’s legal for the state to reduce cost of living increases.
O’Malley spokeswoman Takirra Winfield said, “We have received her memo, and are reviewing it. She has expressed valid concerns and we look forward to working with all of our stakeholders to address these issues in the upcoming legislative session.”
House Speaker Michael Busch has been on vacation, and his spokesperson Alexandra Hughes said the letter had not been discussed by his staff.
The office of Senate President Mike Miller did not respond to a request for comment. But for several years, Miller has been a persistent advocate of sharing pension costs with the counties based on his belief that since county school board negotiate the salaries on which pensions are based, they should share some of their costs.
County school boards already pay the employer’s share of Social Security taxes.
The union lambasted “the myth of huge salary increases,” backed up by a chart that showed that average salaries for teachers and state employees had both gone up about 43% over the last 10 years. The average teacher’s salary is now $58,855 and the average state employee makes $47,380, according to the figures drawn from the annual financial reports of the state retirement system.
Overall, the union is asking that the legislature establish a plan to reduce contribution rates and restore benefits as investment returns improve.
The union points out that the large $19 billion unfunded liability of the pension system is due to the failure of the state to contribute its full required contributions and investment losses in four of the last 10 years, points acknowledged by most of the state’s pension experts.
But other experts contend that the state is unlikely to achieve the 7.75% return on investments it is projecting, and the unfunded pension liability is billions of dollars more. The state estimates that is only has the money to pay for 63% of the promised future benefits.
In its July report on Maryland bonds, Fitch Ratings said its estimate of the state’s unfunded pension liability was even higher than that of the Maryland retirement system, because it assumed a lower 7% return on investment. Moody’s also noted that Maryland’s pension funding of 63% “is at a lower level than most similarly rated states.”
However, in fiscal year 2011, the pension system’s investments made a 20% rate of return. Most of this had to do with successful private equity investments, though public equity and real estate also performed well.