Maryland should look to local government for pension solutions

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By Ken Decker

Caroline County Administrator

For MarylandReporter.com

Potential solutions to Maryland’s looming pension crisis can be found in the one place the legislature would never think to look: Local governments.

Caroline County has its own pension system.  Five years ago, the County’s retirement plan was less than 65% funded.  Today, the funding level has increased to over 81% despite substantially lowering the expected rate of return on investments.  Caroline’s fund for retiree healthcare (“Other Post-Employment Benefits”) is over 100% funded.  The state of Maryland has almost nothing set aside to fund its generous retiree healthcare benefits.

Poor county outperforms state

How did one of Maryland’s poorest counties outperform state government?

The County Commissioners budgeted pension contributions first.  Our elected officials and employees accepted short-term sacrifices for long-term solvency

When progress occurred and the “required annual contribution” shrank, we kept our employer payments at the same level.  The commissioners adopted comprehensive reforms and we radically restructured our pension investments to minimize management and administrative fees.  Perhaps most importantly, we focused on fixing the problem rather than fixing blame.

One interesting change the commissioners adopted was to move newly hired senior managers out of the pension system into a defined contribution (457b) plan, (the public sector equivalent of a 401(k) plan).  If promoted, an employee vested in the pension can remain in, but new directors are not eligible for the traditional pension plan.

When the county hires senior managers externally, many are mid- or late-career professionals.  A “thirty-years-and-a-gold watch” retirement benefit is rarely compelling to a person with less than 10 or 15 years left to work.

In our recent recruiting experience, Millennials also are not terribly enthusiastic about a benefit that takes 30 years to fully realize.  This is crucial because a retirement plan isn’t simply a way to enrich public employees; it is a tool for recruiting and retaining a quality workforce.

Hogan plan a starting point

Gov. Hogan’s proposal for a defined contribution plan can be a starting point for a long overdue grown-up conversation about the state’s pensions and retiree healthcare benefits.  For a defined contribution plan to be a realistic option, however, Maryland should follow Caroline County’s lead and invest more than a modest 5% match, particularly since these plans shift all investment risk onto employees.  Our employer match for defined contribution plans is the same as the employer share paid into the pensions system, currently about 14%.

Maryland also should consider preserving the existing pension system for rank-and-file employees while moving more highly compensated managers (who are often better able to save for retirement) onto defined contribution plans.  In our experience, pension reform is more successful if the priority is making the retirement system solvent rather than using pension changes to balance the annual budget.

Maryland employees and taxpayers deserves better approach to pension obligations than, “Wait till next year!”

The state’s expected rates of return for pension investments are still too high (7.55%).  The level of funding into the plans is still too low.  Retiree healthcare funding has been ignored for far too long.

Some plans like Maryland’s Law Enforcement Officers Pension System (LEOPS) are simply too expensive.  The employer share for LEOPS participants in the coming year will exceed 39%.  Paying an additional 39 cents on every dollar of wages for any retirement plan simply is not sustainable.

Hybrid models for iPhone generation

Local governments have found some excellent models including hybrid systems that combine the best qualities of traditional pensions and defined contribution plans.  We have also recognized that the new generation of iPhone7 employees want more than a “rotary dial” retirement option.

The state of Maryland can afford to provide its employees with a financially sound pension system and additional retirement benefit options, but the state cannot afford to continue kicking this can down the road.

Ken Decker can be reached at kdecker@carolinemd.org