ANNAPOLIS – An economic adviser to the state of Maryland told lawmakers Thursday that they should immediately begin switching state employees from traditional pension plans to a 401(k) plan to slow a growing $18 billion deficit in retirement benefits. “I don’t know that we have the luxury to wait … because we don’t know what the future looks like for Maryland revenues,” economist Anirban Basu told the Senate Budget and Taxation Committee. “At some point the federal government is going to stop spoon-feeding the states with money and start really reducing aid to state governments, and that will leave Maryland in a very precarious position.”
The state plugged $350 million in pension payments with federal stimulus dollars in the past two years. Maryland is now facing a $1.6 billion budget gap for fiscal 2012, and stimulus funds have dried up.
“The economy has become pretty reliant on federal spending,” said Basu, CEO of Baltimore consulting firm Sage Policy Group Inc. “It may be that this is really going to be our undoing.”
Basu said the current system is unsustainable because it relies on actuarial cost estimates spanning 30 years into the future.
“It puts the state in financial jeopardy,” he said, whereas a defined-contribution — or 401(k) — system requires the state to make upfront payments into employees’ retirement plans at a fixed rate.
Pension reform has become a main focus in the two-week-old 2011 session. Few lawmakers have endorsed shifting to a 401(k) plan, because the transformation would be costly at first and state employees and their unions are vehemently opposed.
Basu noted that the state has a few options when it comes to raising taxes.
“There are certain places … where our taxes are among the lowest in the country,” he said, using the alcohol tax — another hot topic this session — as an example.
O’Malley has shifted any responsibility for new taxes onto the legislature. If lawmakers propose tax increases, he says he will consider them; but his budget will be comprised entirely of cuts.
Sen. Richard Madaleno, D-Wheaton, asked why neighboring Virginia seems to be faring better than Maryland.
“A lot of this is traceable to Thornton, I think,” Basu said, referring to a package of education funding
laws the General Assembly passed in 2002. Lawmakers never identified a funding source for the costly legislation, and an ensuing string of strong economic returns “hid that deficit” until the recession, he said.
Basu said it will probably take the state four or five years to return to pre-recession employment levels. The state can hurry its recovery by slashing taxes that are particularly high — including the personal income tax — and engaging in an aggressive campaign to recruit new businesses to Maryland.
“When you border the state that is often recognized as the best business climate in America — Virginia — you have to be competitive … or it’s going to cost you taxpayers,” he said. “You have to think … is the juice really worth the squeeze?”
