Thursday, October 14, 2010

Maryland Pension Problems Need To Be Addressed, Not Avoided

An excellent editorial in Wednesday’s Washington Post hit all the right notes regarding Maryland's steep public pension funding deficits. Once upon a time—that is, in 2002—Maryland's state pension was fully funded. But as the editorial points out, Maryland's financial shortfall in funding former state employee pension liabilities now exceeds $18 billion, with unfunded health-care obligations piling on another $15 billion.

With that dire $31 billion deficit in mind, the editorial provides highlights of how Maryland made a financial mess for itself when it comes to public pension funding:
  • beginning in 2003, state lawmakers reduced annual payments into the pension fund
  • in the latter half of the 2000s, state lawmakers increased spending on programs without attempting to meet increasing pension obligations
  • in 2006, state lawmakers by increasing pension payouts to retired teachers and state workers retroactively to 1998, adding $1.8 billion to state pension liabilities over 25 years
    state pension equity investments underperformed without state lawmakers making pension fund adjustments
  • the economic downturn beginning in 2008 that included steep declines in stock values without any corresponding fixes by state lawmakers to state payments further steepened the pension fund's financial imbalance
And so Maryland faces a $31 billion public pension funding shortfall. Now what?

The editorial goes on with some straight talk for state lawmakers and the commission recently tasked with studying Maryland's pension funding problem (see the blog post "Maryland's Slow-Moving Sustainability Commission"). The recommended remedial steps for Maryland include:
  • moving future employees away from a defined benefit pension system (where the benefit on retirement is determined by a set formula rather than investment returns) onto a defined contribution pension system (where the ultimate pension benefit is determined by investment returns)
  • phasing in over the next decade a that full payments be made for public pensions
  • transferring a portion of retired teachers' pensions to local governments that incur long-term debts for the state through negotiated agreements between local school boards and teachers unions
One can also add that nothing should stop Maryland lawmakers from considering those steps—particularly modest increases on annual state payments to public pension funds—even before the Sustainability Commission issues its reports. If it's too much to ask lawmakers to solve Maryland's public pension problems, can't they at least be expected to hold the line on public pension liabilities and keep the situation from growing worse?

The editorial acknowledges that “[a]ny or all of these steps will be difficult and require leadership." But that is precisely what leaders are elected to provide. And the steps will only more difficult if Maryland lawmakers continue to avoid the state's pile of pension debts.