The pension systems in Maryland and Virginia remain a huge liability for already beleaguered state budgets, and the peril is growing as state officials bank on extremely optimistic investment returns during uncertain economic times to pay off soaring retirement costs. Both states face roughly $17 billion in unfunded pension liabilities and Maryland has wracked up a tab nearly that high in health care commitments for retirees.
To make those payments, both states would need to experience at least a half-decade of double-digit investment returns to draw pension funding in line with expectations — a prospect that analysts dismiss as unrealistic.
| The following Virginia employees are earning the 10 highest base salaries in state government this fiscal year. |
| Charles Grant VRS Chief Investment Officer $392,700 |
| Robespierre Del Rio Northern Virginia Mental Health Institute Physician Manager $247,890 |
| Yadollah Jabbarpour Catawba Hospital Catawba Hospital Physician Manager $243,002 |
| John Grier VRS Investments Program Director $241,036 |
| Field Griffith VRS Investments Program Director $240,907 |
| Kenneth Howell VRS Investments Program Director $240,777 |
| Steven Henderson VRS Investments Program Director $240,519 |
| Stephen McClelland VRS Investments Program Director $240,519 |
| Steven Peterson VRS Investments Research Director $237,615 |
| John Alouf VRS Investments Program Director $226,485 |
“We as a state are not sufficiently prepared for the most likely scenarios,” said Anirban Basu, president of Sage Policy Group in Baltimore. “Investments have to return better than we expect them to for the Maryland pension system to proceed smoothly.”
Basu said he was concerned that Maryland, “already one of the most heavily taxed states,” would turn to “tax-weary residents” to account for any future losses.
The recent tanking of financial markets amid concern over the federal deficit and a debt crisis engulfing European economies makes it unlikely that state pension funds will see anything like the growth needed to stay on track to fund pensions in the fiscal year ending in June 2012, experts said. Both Virginia and Maryland experienced a roughly 20 percent return on pension investments last fiscal year. However, those sizable gains come after years of historic losses.
The pension crisis is hardly unique to the Potomac rivals. State and local governments nationwide are buckling under the burden of rising retirement commitments, unable to rely on expected investments to pay off the mounting tab.
Liberal bastions such as Rhode Island are considering significant pension overhauls and other benefits-busting moves once considered inconceivable in a blue state.
Maryland is one of only three states that pays entirely for teacher pension costs, where more than 27,000 retired teachers and beneficiaries bank an average pension of nearly $20,000 a year.
However, union leaders say that Maryland officials should refrain from going after employee pensions to solve budget woes.
“Quite honestly, folks have gone multiple years without cost of living increases and step increases,” said Doug Prouty, president of the Montgomery County Education Association. “That can’t keep happening forever. You have to remember that cuts on public employees affect services.”
About 175,000 state workers — mostly teachers — saw their pension contributions this year rise from 5 percent to 7 percent of their income. But adjustments lowering pension payments based on years of service were applied only to new employees.
In Virginia, officials this year gave employees a 5 percent raise in exchange for increasing pension contribution rates to 5 percent of salary.
Elizabeth Kellar, president of the Center for State and Local Government Excellence, a nonprofit that analyzes government spending, said both states would likely be forced to examine similar moves in the future to stay atop pensions costs.
“These changes that may look small make a huge difference over time in strengthening pension plans,” she said. “It’s not only investment returns that matter; it’s the kind of promises you’re making to [employees].”
Officials in both Maryland and Virginia have opted against massive changes to pension plans, such as moving to a 401(k) retirement system. Sage’s Basu and other economists say that such a shift would help officials corral volatile pension expenses by billions of dollars in the long run.
Just half of Montgomery County general government employees, for example, receive traditional pensions in which retirees receive a set monthly payment from retirement until death. Yet they accounted for 88 percent of taxpayer money — $103 million — pumped into the retirement system last fiscal year.
Josh Barro, a senior fellow with the Manhattan Institute, labeled Virginia’s pension system as in a “more favorable position than Maryland” but still “not a whole lot better than the national average.”
And without monumental pension changes on the horizon, analysts say that both Maryland and Virginia will be overly reliant on Wall Street to ensure funding of their fragile retirement systems.
“It’s counterintuitive but [pension investments] have been getting riskier,” Barro said. “If you lower the return target, you will get push back because people who are making budgets don’t want to put more money into the system.”
