Marta Mossburg: Pensions will sink state budget

Maryland Gov. Martin O'Malley's latest round of budget cuts shows he is serious about bolstering his election chances, not about protecting taxpayers' future.

Maryland needs to close an estimated $700 million shortfall in this fiscal year. But of the $280 million in preliminary cuts O'Malley suggested and the Board of Public Works last week approved, the vast majority of items were one offs. It's as if he went through his political closet and decided to toss the equivalent of a few sweat-stained band t-shirts, ripped jeans and outdated ties - all of which must be replaced.

Stimulus funds will replace state dollars for Medicaid for the short-term. But a whopping bill will come due in coming years. And state universities and colleges will deal with $40 million less this year, but don't expect them to ask for less next year. And so-called efficiencies including renegotiating leases and cutting a few state positions, one-third vacant, will not bridge the state's underlying $2 billion structural deficit.

The chief fiscal analyst for Maryland's Department of Legislative Services, Warren Deschenaux, warned against making superficial trims. In a July 8 letter to leaders of the General Assembly he said, "the situation confronting Maryland is extremely challenging and will only get more so as the stimulus is withdrawn." He urged legislators to make prompt cuts that "must be substantial and durable."

One item that fits that description is state employee benefits, which far exceed those offered to working stiffs in the private sector. The average state government employee benefit package in Maryland is $24,347 per year for its 50,659 full time equivalent employees, according to the 2008 Annual Personnel Report from the Department of Budget and Management. (Some employees are excluded from this report, including those from the University System of Maryland.)

State statistics are not available, but nationally, state and local government employers spend 72.8 percent more on employee benefits than private sector employers do for their workers, according to the nonprofit, nonpartisan Employee Benefit Research Institute. (EBRI)

Since private sector workers in Maryland make less on average than state and local government workers, benefits exacerbate the wage differential. They are also immoral. Why should those who make every government job possible be forced to fund benefits they will never receive?

State government workers continue to enjoy defined benefit plans while more and more private sector workers must rely on defined contribution plans as employers shed the former to save money.

And a recent study conducted for Charles Schwab Corp. by CFO Research Services showed that since last September, 23 percent of employers have eliminated or plan to eliminate matching contributions for employees' 401(K) plans, making individuals even more responsible for saving for retirement. Some big names that have suspended matching contributions include Starbucks and Eastman Kodak.

Experts say the percentage of small businesses eliminating matching 401(K) contributions is higher than the figures in the Schwab study.

Worse, at the same time, contributions from taxpayers to fund state employee benefits must increase to make up for poor investment performance.

EBRI research shows that from 1997 to 2007, except for fiscal years 2001 to 2003, investment earnings contributed 71to 82 percent of public pension funding, employer contributions made up 13 to 20 percent of the cost, and worker contributions were 6 to 9 percent. In FY 2001 to 2003, when states needed to make up for poor investment performance, taxpayer contributions ranged from 31.3 percent to 58.5 percent of the overall burden.

In my hometown of Baltimore, taxpayer contributions for local government employee benefits are increasing 16 percent in the current fiscal year from last year. The March preliminary budget said, "barring a miraculous rebound between now and June 30, 2009, the City will face massive pension obligation costs in Fiscal 2011, even if proposed pension reforms are enacted." Since the Dow Jones Industrial Average was down nearly 3,000 points in fiscal 2009, that miracle didn't happen and won't happen for cities and states around the country.

O'Malley said that cutting employee compensation and aid to local governments will be part of his next wave of suggestions to balance the budget. Reducing leave time, furloughs and other cosmetic adjustments may tweak the budget just enough to make it work for this year.

But leadership requires he tackle the politically dangerous task of reforming pay for some of his biggest supporters: state employees. The alternative will create two Marylands - one for the rulers in state and local governments and one for the serfs who must finance their lifestyle.

Examiner columnist Marta Mossburg is a senior fellow with the Maryland Public Policy Institute and lives in Baltimore