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Published on October 30th, 2013 | by Len Lazarick

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$50 billion in unfunded state and local retirement benefits, study says

By Len Lazarick

Len@MarylandReporter.com

Pension system logoThe money Maryland’s state and local governments have failed to set aside to fulfill pension promises made to teachers and employees has ballooned to more than $22.5 billion over the past five years, a new report has found.

But the counties that run their own pension systems are in much better shape than the state of Maryland, with the exception of Prince George’s County.

The most under-funded retirement benefits continue to be health insurance for these retirees, which amount to $28 billion for state and local governments. Only a handful of county governments have tried to sock money away.

Those are some of the findings of a new report titled “Perpetual Shortfall” from the Maryland Public Policy Institute written by Gabriel Michael, a senior fellow and a doctoral candidate in political science at George Washington University. The institute has a free-market orientation, and has been a persistent critic of government pension systems.

“I hoped to gather together all in one place” all the financial reports from the jurisdictions, Michael said. “No one has actually done that.”

Retirement agency disputes findings

Told of the major findings of the study, the chief of the State Retirement Agency said much of it was old news. The study disregarded fixes made in pensions for state teachers and employees in 2011, and reform of funding mechanism passed just this year, he said.

“While liabilities are expected to grow in the next few years, based upon all the actions taken, the liabilities are expected to begin declining in FY 2017 and will continue to do so each year thereafter,” Dean Kenderdine, executive director of the State Retirement Agency, said in an email. “The system expects to be 80% funded by FY 2024.”

Michael said the underfunding of pensions “has been going on for a long time. Yes, we had some reforms in 2011 but those kinds of reforms tinkering around the edges are not going to be enough.”

“The root cause is that political leaders are unwilling or unable to consistently allocate the required funding for pension systems on an annual basis,” Michael says in the report. “In theory, properly managed defined benefit pension s can provide secure and relatively generous retirement income to public employees at a low cost to the public. In practice, entrusting proper management of long-term fiduciary funds to political leaders is a recipe for disaster.”

Overall, Maryland pension system is 64%, and most counties in the state at 70% or 80%. But Prince George’s County pensions for police, fire, corrections and sheriffs are funded at the 52% to 58% level, with a $871 million unfunded liability, nearly a third of the total liabilities combined for all the counties that run their own pension systems. (Six counties and many municipalities are part of the state pension system.)

Pension rates of returnLittle money put aside for retiree health care

Maryland governments have been putting virtually nothing away for other post employment benefits (OPEB), principally health care and prescription drug coverage. But unlike pensions, which generally cannot be changed after they are earned, retiree health benefits can be. That’s what the state did in 2011, reducing coverage and increasing the share paid by the retirees.

That reduced the state’s unfunded liabilities from over $15 billion to less than $10 billion. Also at that time, the legislature at the urging of Gov. Martin O’Malley increased the employee contribution to their pensions from 5% of their salaries to 7% and increased the retirement age and other pension eligibility requirements. State workers and teachers also pay into Social Security. Those changes came despite fierce opposition by public employee unions.

In a repeat of criticisms made in previous MPPI studies, Michael also said the pension funds “rely on unrealistic assumptions. Most pension funds assume average rates of return that are too high given historical experience.”

Maryland has assumed a 7.75% rate of return on its assets, currently at $40 billion, but the board of the State Retirement and Pension System reduced that to 7.55% over the next four years. Reducing the assumed rate of return increases the amount of money the state must put in every year to make up for reduced earnings.

Michael produces the graph above that shows “annual rates of return fluctuate wildly.”

He said the 10-year averages are more important. “In nine out of the 10 fiscal years since 2002, the 10-year average rate of return for SRPS has failed to meet the 7.75% assumption,” he said.

And the 20-year average in 2011 is 7.6%, below the target as well.

“Chasing unrealistic rates of return has led pension funds to increasingly turn to opaque, expensive and risky alternative asset classes,” such as private equity (stock in companies not sold on the open market) and hedge funds.

Kenderdine said investing in private equity and hedge funds has protected the state from bigger losses in the stock market.

For recent MarylandReporter.com stories related to pensions, click on this link.

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  • eatingdogfood

    Its The Unions; Stupid !!!

  • votingmatters

    Far from being alone in their plight, sadly Maryland’s results are pretty much the norm – with governments systematically failing to implement sustainable accounting standards and practices. The public and its employees are owed an answer. For more background visit http://www.informedmajority.com.

  • snowmaggedoned

    It’s also the election payoffs to the Unions!!

  • DiogenesRedux

    The state and local/county politicians, through the “good graces” of financial managers are counting on Obamacare to replace the benefits and premium-driven existing plans, and the plan members will have only a stark choice of the new exchanges or drastically increased deductibles and premiums for continuing existing type plans.

  • Tough Love

    END retiree healthcare subsidies and FREEZE all Public Sector Defined Benefit pension Plans (replacing them with MODEST DC Plans). … PERIOD.

    WHY should Taxpayers pay for a benefit for other that THEY almost NEVER get … and all while those Public Sector workers earn no less in cash pay.

  • Tough Love

    Quoting …”“The root cause is that political leaders are unwilling or unable to
    consistently allocate the required funding for pension systems on an
    annual basis,” Michael says in the report. “In theory, properly managed
    defined benefit pension s can provide secure and relatively generous
    retirement income to public employees at a low cost to the public. In
    practice, entrusting proper management of long-term fiduciary funds to
    political leaders is a recipe for disaster.”

    While his final (last sentence) conclusion is correct, if Gabriel Michael actually made that statement, he had a real brain freeze. While any DB Plan can be designed with generous or modest benefits, generous DB Plans (as ALL are in the Public Sector) NEVER EVER come with a low expected cost to Taxpayers.

    Sure, they would if we had a 30 year bull market, but it’s absurd to bind the Taxpayers’ pocketbook to such a remote outcome.

  • Libetarian

    It’s liberal policies and big government power mongrels who are laden with greedy entitlement-attitude government employees that suck the state vaults dry. And lefties say corporations are greedy!? Give me a break. I’ll take a corporation employee any day over a bureaucrat. Primary reason, corporations are innovative risk takers who earn money — that is, they’re money makers. While on the other side of the financial spectrum you have the government employees (city, state and federal) who are money takers. Unfortunately the takers out number the makers. Eventually, printing money or collecting debts from foreign nations will be the only source of revenue because they pool of makers will evaporate. Inflation is just around the corner. Wake up America, or should I say Amerika?!

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