June 20, 2012

Maryland needs more pension reform, study says

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By Len Lazarick
Len@MarylandReporter.com

Pension system logoMaryland is in the same pension pickle as three-fifths of the other states, with its management of its long-term retirement obligations causing “serious concern” to the authors of a new study by the Pew Center on the States.

“States continue to lose ground,” said David Draine, one of the authors of “The Widening Gap” that showed states had a $1.38 trillion gap between assets and pension obligations, up from $1 trillion, which the first Pew report found two years ago. In that time, Maryland’s unfunded pension liabilities have risen from $11 billion to $19 billion, and now its assets would pay only 65% of its promises to retired state employees, down from 78% in 2008.

Like 43 states facing similar problems, Maryland made substantial changes in its pension system last year, increasing contributions from employees, reducing cost-of-living increases and tightening benefits. These changes are supposed to bring the retirement system up to 80% funding in nine years.

But the Pew Center report says additional reform will be needed, especially since Maryland and other states continue to short-change the recommended annual contributions to the pension system.

Annual required payments not being met

Commenting on the report, representatives of the unions with the most members in the employee and teacher pension systems — AFSCME and the Maryland State Education Association — both said the state needed to start making its actuarially required contributions.

According to Pew, in 2010 Maryland was supposed to put in $1.5 billion in the budget toward pensions, but only put in $1.3 billion.

“Far too many states have not been paying their actuarially required contribution for a long time, and Maryland would be one of them,” said Dean Kenderdine, executive director of the Maryland State Retirement Agency.

While much of the 35% shortfall in pension assets is due to investment losses in four of the last 12 years, about 4% of the unfunded liabilities is due to the state use of the “corridor method” of funding the pension system. Instituted when the pension system was almost fully funded, the corridor method allows the state to base its payments into the system on the previous year’s contribution plus 20% of the difference of what the payment should be. This eliminates large jumps in what taxpayers must put into the pension system.

“It’s really putting off the payment,” Kenderdine said. “It’s really pay me now or pay me a whole lot later.”

Since 2007, the board of the State Retirement and Pension System, headed by State Treasurer Nancy Kopp, has repeatedly asked the legislature to eliminate the corridor method and increase pension contributions now.

Changes coming to funding method

The General Assembly may finally be ready to make the change. In the Joint Chairmen’s Report on the state budget April 9, the legislature added language requesting that the retirement agency and the Department of Legislative Services  “develop a plan to phase out the corridor funding methodology” and adjust the actuarial assumptions.

By phasing out the corridor underfunding, “we’re not going to be paying [the full required contribution] for a few years,” Kenderdine said. “It’s going to take a number of years to fix.”

Even with increased contributions from the state budget, the Maryland pension system is still relying on the assumption that it will get a 7.75% annual return on its investments, much higher than the average for the last decade, but lower than the average return for the past 25 years.

In fiscal 2010, the system’s investments earned 14% and in fiscal 2011, they earned 20%.

“States cannot sit back and hope the stock market to bail them out,” Draine said.

But he also emphasized that the problems are long term, not immediate. “All of these states have enough money to cover benefits five, 10 years or longer,” Draine said.

Current Maryland benefits

Under the old teachers retirement system, closed to membership since 1980, 30,000 retirees with an average age of 74 get an average of $32,000 per year. In the teacher pension system, which covers 103,000 educators, 30,500 retirees with an average age of 68 get $18,000 per year.

Under the old employees retirement system, closed to membership since 1980, 23,000 retirees with an average age of 73 get an average of $19,000 per year. In the employee pension system, 39,000 retirees with an average age of 67 get an average of $12,000 a year.

In 2011, the legislature substantially changed health care benefits for retirees, cutting $6.7 billion in liabilities that had been estimated at $16 billion, another cause for concern in the Pew report.

  • abby_adams

    I find it odd that so many Democrats demonize Wall Street yet depend upon stellar returns to fund pension systems. With MD taxpayers being stretched to the max with all the higher taxes, fees and tolls, will the majority party turn to extracting even more $$ from us?

  • Hungrypirana

    Len’s piece needs to be filed under YA THINK?: “Maryland needs more pension reform, study says”

    A comprehensive assessment of ways and means to ameliorate massive shortfalls in Maryland’s post-retirement benefits’ funding was needed during the O’Malley administration, but it was never done.

    Although O’Malley cut post-retirement medical benefits during 2010, the latest data from 2011 reflecting O’Malley’s benefit reductions show Maryland has promised $9,732,430,000 of health benefits to retirees but has funded only 2%; less that $200 million. During 2011 the pension shortfall increased to $18,800,000,000

    In fact, Maryland’s true underfunding predicament is materially worse than the Pew report’s chilly outlook. For instance, Maryland utilizes nearly the highest investment rate of return (7.75%) permitted by accounting standards. It should use a realistic RoR of around 3%. Using the lower rate would increase the present value of unfunded obligations $5,000,000,000 according to my rough calculations.

    As an aside, Pew’s ratings scheme is flawed because it leaves the impression that underfunding conditions are not as severe as they are in fact. Pew gives separate ratings for states’ stewardship of pension and retiree health obligations. This methodology is incongruous because states have concurrent, not severable, liability. Hence, I suggest Maryland’s overall underfunding condition should be given the worst possible grade, “Serious Concern.”

    Lastly, I tried but could not verify the following statement from Len’s article: “In Fiscal 2010, the system’s investments earned 14% and in Fiscal 2011, they earned 20%.” These returns appear incompatible with the trust funds’ investment holdings (from CAFR) and market conditions prevailing in those years.

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  • Hungrypirana
  • Cwals99

    We all know that Maryland’s pensions as with the states across the country are having trouble not because they are too generous, but because of underfunding, bad investing, and the economic downturn from the massive Wall Street fraud, none of which is the employees fault.  Before any changes to pensions are made there needs to be a pension reform regarding laws protecting these pensions from all of the above.  Why use one fix before fixing the real problems?  Also, the $25 billion mortgage fraud settlement was merely an interest payment to the fraud and our Attorney General needs to bring back to the state what can be several billion dollars in fraudulent profits.  There is the a solution everyone supports!