By Len Lazarick
Comptroller Peter Franchot and Gov. Larry Hogan’s budget secretary are both raising objections to a proposal reducing state pension payments, saving money that may be used to increase education aid and state employee salaries.
“It is a bait and switch on rank-and-file teachers and state employees,” said Franchot, as well as “bait-and-switch” on the state’s rating agencies and taxpayers.
“It is gaming the system to constantly switch from one system to another,” Franchot said, with the state constantly seeking ways to set aside less money for the retirement system.
“If we perform exceptionally well [on investments], this will be a good decision,” Budget Secretary David Brinkley told the House Appropriations Committee Friday. “If we don’t perform as we have been or hope to … it will be a disastrous decision.”
The legislature’s staff is recommending that legislators eliminate extra payments into Maryland’s underfunded pension system and return to full actuarial funding.
The proposal would save $70 million in next year’s budget and $2 billion over the next 10 years. But in the following 13 years it would ultimately cost taxpayers $2.5 billion more than current plans for pension contributions,
One of the justifications for the change is the strong investment performance of the past two years — 10.5% and 14.3%, compared to a target of 7.65%.
Yet in the long-term, “Maryland’s pension fund has performed very poorly when compared to its peers,” said Brinkley. He serves ex officio on the Board of Trustees of the State Retirement and Pension System, as does Franchot, who is the board’s vice chair.
The 14-member board will hold a special meeting Tuesday morning to take a formal position on the proposal presented by the legislature’s pension expert, Michael Rubenstein last week.
Major 2011 changes led to supplemental payments
The legislature passed major changes to teacher and state pensions in 2011. Public school teachers and state employees now pay 7% of their salaries toward pensions, and will get lower benefits.
In exchange, the state promised to pay an extra $300 million into the pension system to make up for failing to contribute the full actuarially required amount for the past 12 years.
The state has never made the full supplemental payments, which have been the target of budget cuts. The new proposal totally eliminates them.
Del. Tony McConkey, R-Anne Arundel, asked “What moral obligation do we have to our promise to the employees?”
Del. Mike McKay, R-Allegany, said, “A promise made is a promise kept. My concern is we made a deal with these employees.”
The current payments system and high investment returns have made 80% pension funding possible by 2021. The reduction in pension payments puts off 80% funding of the pension system till 2023, the original target of the 2011 pension changes.
The state’s pension promises are currently only 68% funded.
Brinkley said if the cuts were made, he would like to see any savings applied to funding for retiree health insurance and other benefits, which have little advance funding.