On state pensions, 'Everyone else is doing it' is no excuse

Marta Mossburg says Maryland should stop overestimating the rate of return to its retiree pension fund

February 12, 2013|Marta H. Mossburg

In 1931, economist John Maynard Keynes lamented, "A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."

Substitute "state treasurer" and "pension board member" for "banker" in the quote and it describes someone who oversees a state retirement and pension system whose 350,000 members either rely on it in great part for survival or will in coming years.

Take the most recent missive from State Treasurer Nancy Kopp in the January issue of Retiree News and Notes. She told retirees that their pensions were secure because the state is doing what practically every other state across the country is doing: overestimating the rate of return each year on investments.

In what could be called the lemming argument, she writes, "How does Maryland compare nationally? A recent public fund survey of 126 plans found that 8 percent remains the predominant rate assumption among 43 plans, with the overall average at 7.8 percent." Maryland's target return rate each year is 7.75 percent, but last fiscal year it earned 0.36 percent and over the past 10 years, 5.89 percent. As a result of poor returns and underfunding, the state pension system is about $21 billion in the hole, and more likely about $38 billion if a realistic rate of return is adopted. She says not to worry, though, because the return over 25 years meets the mark. Under that logic, why not change the investing horizon to 40 or 50 years to make things look better?

Karl Pfrommer, a 72-year-old former Maryland Public Television employee, has studied the pension issue and is concerned about how it will impact future employees and state taxpayers. "I am going to be dead before the house of cards implodes," he said. "But it [pensions] will affect everyone with higher taxes."

He said he does not think fellow retirees understand the issue, in large part because AFSCME, the largest state employee union, "is defending the pension system instead of the retirees." The system is 64 percent funded, and the Pew Center on the States calls Maryland's management of its liabilities "cause for serious concern."

Ida Williams Ward, president of AFSCME Retirees Chapter 1, did not respond to a request for comment. But state retirees, those headed there and everyone in Maryland should demand full funding of the system, an accurate accounting of what is owed and structural changes to pensions so that the state can keep its promises without taxing its citizens into permanent decline.

So far, Gov. Martin O'Malley, who routinely points out the "bad math" of his predecessors, has only helped to accelerate the $37 billion state pension system's slide toward insolvency with budgets that shortchanged the system every year since he took office. If pension funding continues to decline, the state could lose its coveted AAA bond rating that lets it borrow money on the cheap. Considering principal and interest on bond debt has risen 50 percent, to $984 million per year, since Mr. O'Malley took office, taxpayers could soon be shelling out more for debt service than for public safety.

The state can get back on a path of fiscal responsibility, however. Republicans in the House of Delegates recently released a package of legislation, including HB 387 and HB 239, designed to lower costs, give state employees more choice in their retirement options, align investment returns with reality and fully fund retirement obligations.

As Washington County Del. Andrew Serafini wrote in a press release describing the legislation, "this is not a political issue. Democrats and Republicans can come together to solve this issue to keep the state's commitment to its employees."

He added, "This legislative package will put Maryland's pension fund back on solid ground so that our state retirees will never have to worry if their pension check is going to clear and will give all state employees flexibility in how they structure their retirement planning."

Taxpayers should not let those who hide behind the false shield of mutually assured destruction ruin the future of Maryland. Look up HB 387 and SB 239 on http://mgaleg.maryland.gov and then call your legislators and ask them to support pension reform this year.

Marta H. Mossburg is 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.

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