April 10, 2012|Marta H. Mossburg
State legislators often prioritize important legislation the way kindergartners rank vegetables among the food groups.
They focus on media-friendly social legislation instead of structural reform requiring time and effort to understand and craft. Why, for example, did they pass gay marriage and a law regulating how long a child must face rearward in a car seat but not figure out the budget until the absolute last minute? And why didn't they spend time this year on how to pay the pensions of the 373,000 people in the state retirement system?
A big part of the problem is that very few of those in each chamber have owned a business — or more basically, understand math — as evidenced by budgets that continually outpace state revenue. It is a major problem that keeps getting worse, with tax policy looking each year more like an escalating game of Whac-A-Mole.
Electing representatives with more apt job experience is necessary but does not eliminate the need to address pressing financial issues like the management of the Maryland State Retirement and Pension System. A few get it. Del. Andrew Serafini, a Washington County Republican, is one of them. Mr. Serafini, a financial adviser, knows that if the pension system does not achieve the returns it sets for itself, taxpayers will be on the hook for shortfalls. Paying for those will make this year's alleged "doomsday" budget look like a lavish Vegas buffet for social programs and state agencies.
And we have a lot to worry about. For years, legislators have been underfunding the pension system and relying on rates of return that 401(k) holders and the state's own books show to be delusional. Barring needed reforms, properly funding the pension system would require new tax brackets for everyone — not just millionaires — in Maryland, as the system is less than 65 percent funded.
There are some bright spots. Reform passed last year requires state employees to work longer and contribute more for their benefits, a step legislatures around the country are taking to ensure the solvency of their state plans.
But a lot more needs to be done to make the system solvent for the long run. A method of funding retiree benefits that makes it legal to shortchange the system must be terminated.
Mr. Serafini pinpoints another issue ripe for change: investment management. He proposed outsourcing the duties of the chief investment officer (CIO) to a consultant. It makes sense. As he said, "Clearly, we don't have the skill set to manage some of these complex and intricate strategies. Our pay system is not consistent with the industry. It may be consistent with other states, but it means that we always will be the farm system for the big leagues or the place for those that cannot make it to the big leagues." The state's former CIO, Mansco Perry III, is a case in point. Under his leadership, the fund lost billions while he earned "performance" and "effectiveness" bonuses.
On top of that, the pension board is mainly filled with career bureaucrats and union officials with limited financial expertise, making it very unlikely they have the ability to really question pension allocation strategies, particular investments and fees. It shows. Maryland's performance is in the middle of the pack in relation to its peers and trailed overall markets. For example, over the past 10 years, Jeff Hooke of the Maryland Tax Education Foundation has shown, the state's investment performance lags its peers by about 1 percent annually, which translates to $3 billion in lost revenue over that period at the state's $37 billion fund. The state's performance is also significantly lower than large mutual funds, including the Vanguard Wellesley Income Fund and the John Hancock Strategic Income Fund.
Mr. Hooke, an investment banker, recommends indexing the portfolio to save money on Wall Street fees, ($1.5 billion over 10 years) and to guarantee an average investment return. But the real issue is performance.
State employees and retirees, who are banking on a steady stream of income in their later years, and taxpayers, who are responsible for their benefits, deserve a real debate about the best way to manage the money important to millions of lives. This is not a Republican or Democratic issue but a generational one. Our children shouldn't pay for false promises of today's politicians.
Marta H. Mossburg is a senior fellow at the Maryland Public Policy Institute and a fellow at the Franklin Center for Government and Public Integrity. Her column appears regularly in The Baltimore Sun. Her email is marta@martamossburg.com.
