Pensions tilting from afterthought to aftermath

February 21, 2010|By Jay Hancock

New research ranks Maryland among the lowest in the nation in its ability to meet future pension obligations to state employees and teachers.

In a study that came out last week, the Pew Center on the States called out Maryland and seven other states for "having failed to make any meaningful progress toward adequately funding their pension obligations" in recent years.

It's not a disaster for retirees, state employees or taxpayers - yet. Maryland's pension fund had $33 billion in investments at the end of the year - enough to cover obligations for decades.

But the Pew report is another dire warning about the unsustainable path of government spending and the dangers of putting off hard decisions. You could make the same point about Medicare or Social Security.

Politically expedient decisions from years ago have come back to challenge us. The longer we wait to correct them, the worse the pain will be.

"State policymakers can't continue to kick the can down the road," said Kil Huh, director of research for the Pew Center. "It's like credit card debt. You keep putting purchases on it while ignoring the payments - all of the sudden, you have an unmanageable level of debt on your card."

Maryland's fund is billions of dollars below what it needs to meet promises for future retirees - not just because of recent financial market declines but also because Annapolis cut annual contributions to the fund, starting under Gov. Parris N. Glendening in 2003. Then benefits were increased under Gov. Robert L. Ehrlich Jr. in 2006.

In 2008, the year for which Pew collected data, Maryland had saved enough to finance only 78 percent of its future obligations - coming up short by about $10.9 billion. The situation has gotten worse since then, thanks to the stock market crash. Only 65 percent of future benefits were funded as of June, although the number, if calculated, would probably be higher now thanks to the market's recovery.

True, Maryland isn't as poorly off as Illinois, which had funded a miserable 54 percent of its future obligations as of 2008, according to Pew.

But like Illinois and a few other states given low scores by Pew, Maryland for years has been contributing less than what experts say is needed to keep promises to retirees.

"This score is attributable to the fact that since 2002 the state has not paid the actuarially required contribution into the system's trust fund," says R. Dean Kenderdine, executive director of the Maryland State Retirement and Pension System.

Widely accepted accounting rules say Maryland should have put in almost $1 billion more into the system during the past decade than it did.

But under Democrat Glendening, the state adopted squishy, alternative rules - the "corridor method" - that allowed lower contributions. The old rules would have ensured that Maryland's current funding gap would be much lower. So would future pressure to raise taxes or cut benefits.

The decision under Ehrlich, a Republican, to increase pension benefits, at a cost of about $100 million a year, hasn't helped. And the dollar amount of unfunded pension liabilities is almost certainly larger today, thanks to continued meager contributions and declines in the retirement system's investments.

(Important aside: This discussion refers only to Maryland's pension system. As scary as that problem is, it's exceeded by what Maryland taxpayers owe to finance the expensive health care plan for state retirees. As I wrote in December, unfunded liabilities for retiree health benefits are a staggering $16 billion.)

Leaders ought to be accountable for decisions even after they leave office, so I called Glendening, now head of the Smart Growth Leadership Institute. He doesn't remember the switch to the more lenient method of calculating annual contributions, he said.

Frederick W. Puddester, Glendening's budget chief, now working for Johns Hopkins Medicine, played down the change.

"The real answer" as to why the pension fund is short-changed, he said, "is the stock market collapsed."

Under some circumstances, he said, the new method of calculating pension contributions could have required greater annual payments to the retirement system, not lower.

Maybe, but that's not what happened. In reality, the switch gave Glendening and subsequent governors hundreds of millions of extra dollars to spend during their terms while leaving the tab to their successors.

An Ehrlich spokesman said the former governor was unavailable before my deadline to discuss pensions. A spokesman for Gov. Martin O'Malley says the governor wants to address both pension and retiree health care liabilities next year in "a comprehensive solution." Meaning after the November gubernatorial election.

Let's hope that he means it, or that whoever wins has the guts to fix the pension pickle. Maryland needs to mimic Minnesota, which raised the retirement age from 65 to 66 and saved tens of millions in pension costs. Or Georgia, which reduced guaranteed pension benefits for future employees and replaced them with a savings plan similar to the 401(k) accounts that private companies provide.

Political expediency got us into the this terrible position. More political expediency - putting off the tough decisions another few years - would make it much worse.

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