Pension pickle

Our view : Embedded in Gov. Martin O'Malley's restoration of education funds is a likely end to imprudent state-only financing of Maryland teacher pensions

March 01, 2009

The federal stimulus plan may have bailed out Maryland from its budget crisis, but it offers only temporarily relief for one of the state's most vexing budget issues: Who should pay the employer share of teacher pensions? In one of the oddities of how government works - that is, usually along the path of least resistance - this shortcoming may actually be a good thing.

Here's why. Until the Obama administration stimulus passed, teacher pensions were the 800-pound gorilla in the legislature's cage. The requested appropriation for teacher (and school librarian) pensions represented the single largest line-item increase - $139.7 million - in this year's state budget.

Rising teacher salaries, increased benefit costs and poor investment returns - not to mention an accounting error that caused the state to set aside too little last year - are largely to blame. But the program's cost is far from the only problem with this.

It's profoundly foolish for Maryland to foot the entire bill for teacher pensions. Baltimore and the counties are the employers. They set teacher salaries and, in doing so, help set benefits (which are based on salary levels). And because of this, local governments don't have to worry about the full consequences of pay raises.

Worse, it's a formula for making the rich richer. The wealthiest subdivisions receive a disproportionate share of the money because they generally pay teachers the most. This is the anti-Thornton formula. The effort to increase state aid to education was supposed to be about equalizing opportunity; the pension payment does just the opposite.

But here's where things really get interesting. In restoring money to education last month, Gov. Martin O'Malley indicated he would use federal stimulus funds to make the teacher payment. This was allowed under the law, and it represents a nearly $200 million commitment over the next two years. Problem solved - for a while. But what happens next?

This is the question that county executives will soon come to recognize - if they haven't yet.

With prospective slot machine revenues looking less and less like a bonanza, Maryland will be in no position to ride to the rescue. When the federal well runs dry, a gaping fiscal hole will open up. There will be no choice but for the state to turn to local government for help with future pension increases.

Baltimore and the counties would be wise to start planning immediately for that near-certainty. No doubt this will be controversial, but in the end, the schools will be better for it. Teachers won't lose pension benefits; counties won't go broke; and the state will continue to finance the bulk of the program's cost.

Today may not be the day of reckoning for Maryland's flawed approach to pension finances, but that day is now written on the wall.

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