By Daniel Menefee
For Maryland Reporter
The legislature can no longer ignore the state’s $20 billion in unfunded pension obligations, a group of House and Senate Republicans said on Thursday.
“There is a problem in our current pension system,” said Sen. Andrew Serafini, R-Washington County at a press conference. “The current system is unsustainable, it’s uncompetitive, and most powerfully it’s unattractive.”
With no pension reform plans offered by Democrats this session, the group of GOP lawmakers highlighted plans they’ve introduced this session that are modeled after Montgomery County, the federal government and plans enacted in other states. Two of the plans would cut nearly $6 billion in future obligations, according to the fiscal analysis by legislative staff.
“They are tried and true,” said Serafini. “These are not new ideas.”
Serafini said the plans currently in both chambers were not so much about saving money and more about creating predictability to afford future obligations.
“They’re about stopping us from digging the hole even deeper,” he said. He said any savings would go to pay down the unfunded liabilities.
Every household in Maryland would owe $9,221 to maintain the state pension system if the state were to close the $20 billion gap, he said. Currently, state employees contribute 7% of their salary towards retirement and the state matches 18.5%.
The GOP initiatives face little likelihood of passage. They are being proposed by a handful of Republicans in the legislature controlled by Democrats, they face heavy pushback from unions of state employees and teachers, and the state retirement agency says they may violate contract provisions with the employees.
Major changes in the state pension system were made in 2011 increasing employee contributions and reducing benefits for future employees. The changes produced the largest demonstrations seen in the past decade by thousands of state employees and teachers opposed to the changes.
Recognizing the problem
Del. Susan Krebs, sponsor of HB1064, said the Democratic majority has refused to admit the pension system is in trouble.
The plans write down assumptions on pension plan earnings from 7.55% to 6%, which would still require an increase in the annual contribution by $1 billion by fiscal 2019. The state pension board has a committee examining whether it should lower the expected rate of return.
The state pension funds only earned an average of around 4% over the last 10 years, which at that rate boosts the annual contribution even more to $3 billion in fiscal 2019.
“One of the biggest obstacles is they won’t accept the fact that there’s a problem,” Krebs, R-Carroll, said. “They think somehow miraculously the stock market is going to recover and we’re going to get 10% returns and dig ourselves out of this magically, and that’s not going to happen.”
Employee union: plans would break promises
But opposing the Republican pension plans at a hearing earlier that morning, Sue Esty, legislative director of the American Federation of State, County and Municipal Employees, said she recognizes the cost saving measures in the bills, but said the savings are “on the backs of employees” who received a promise when they signed up for their current plans.
“This bill forces those employees who are in the defined benefit plan into [two] choices or in some cases a specific benefit plan,” Esty said.
She said the bill also removes protections from disability.
“There’s no disability benefits under either one of these plans and is a disservice to employees who are getting hurt on the job,” Esty said. “A lot of our employees are in dangerous job [like] corrections, juvenile services, and the State Highway Administration.”
Esty also said the pension funds historically have experienced lows in the stock market and had bounced back.
“It wasn’t that long ago when the [fund] was 100 percent funded,” Esty said. She said the funds would likely go up again at some point.
The plans reduce the state’s contributions to 5% and 8% depending on the plan, while shortening the vesting period to three years, down from 10 years — making it more attractive to “millennials” who move around in the job market, Serafini said.
“It’s about recruitment,” Serafini said. “We need modern plans that can speak to the workforce we are seeing now and it’s about giving employees choice.”
The Cash Balance Pension Plan
Under the plan the employee and the state each contribute 5% of salary into a retirement account and the employee becomes vested in three years. The state guarantees an additional 5% in interest.
An employee who leaves before three years would receive the 5% employee contributions already made plus an additional 5% interest on the entire cash balance.
The employee can also contribute more into state supplemental accounts such as 401k’s and 403b’s, which are not matched.
For teachers under the cash balance plan, they would contribute 5%, the local school board picks up 4% and the state would match 1%. The state would not be on the hook for more if the local school board raises its contribution rate.
Had the Cash Balance Plan been in effect in 2016, future pension obligations would have decreased by nearly $5.9 billion, according to the fiscal note, page 7 and 8.
Under the current fiscal 2018 budget, local governments will contribute 4.47% into teacher pensions and the state will match 11.24%.
Members must be age 62 and vested (three years) to qualify for retirement.
The GRIP plan
The GRIP plan offered by Krebs and Sen. Adelaide Eckardt, SB478 and HB1064, is modeled after a Montgomery County plan and relies on higher state contributions but also would reduce the unfunded liability by $6 billion.
Under the GRIP plan the state contributes 8% and the employee contributes 4% and is vested in the three years. Like the cash balance plan, the state guarantees a 5% return on the account balance. If the employee leaves before three years he will receive only the contributions he made plus an additional 5% interest on the entire cash balance.
Had the GRIP plan been in effect in 2016, future pension obligations would have decreased by nearly $6 billion, according to the fiscal note, page 7.
The employee can retire at any age and take a lump sum or roll this cash balance into an annuity at retirement.
When asked if the number of competing bills could weaken the chance of either passing, the group made it clear that the plans were not meant to compete with each other but rather to offer lawmakers options.
“I don’t think anyone here is saying we want to pass all three bills,” said Del. Jeff Ghrist, R- Caroline, a cosponsor of all three bills. “We’re saying that any of these three bills are better than what we currently have.”
Anne Gawthrop, director of legislative affairs for the State Retirement Agency, said there could be contractual problems by forcing current employees out of their existing plans.
“Requiring all these existing individuals to go into one of these plans would potentially create an impairment of contract issue,” she said. She said Eckardt’s plan would force employees eligible to retire in 30 years to wait until age 62, even if their 30 years ends at an earlier age.
“Moving these individuals over would create a fundamental change to the benefit the state provided them when they came in,” Gawthrop said.
Daniel Menefee can be reached at firstname.lastname@example.org