Soaring pension costs eat away at services

In Maryland, efforts to curb those soaring costs by shifting some of the burden onto the counties from the state are going to mean higher taxes, higher employee contributions and service cuts for years to come, experts say.

Montgomery and Prince George’s county officials already are warning that Gov. Martin O’Malley’s plan to split the state’s $957 million teacher pension tab with the counties would mean painful cuts — not just next year. The plan, for example, would cost Prince George’s $100 million by 2020.

In Montgomery County, the shift could mean larger class sizes in public schools and higher tuition for Montgomery College students, county Board of Education President Shirley Brandman and Montgomery College President DeRionne Pollard said.

The county library budget could be cut, which could mean fewer operating hours or reductions in the number of books available, said Larry Friend, treasurer of the Friends of the Library.

The county is at the legal limit for both property and income taxes, said Montgomery County Council President Roger Berliner, D-Bethesda, pointing to an 150 percent energy tax increase set to expire in June. “We’re running out of options here.”

The proposal is a short-sighted way to balance the budget when the state really needs long-term reform, said Gabriel Michael, a senior fellow at the Maryland Public Policy Institute.

“We need to look for a way that actually eliminates the costs, rather than just shifting them,” he said.

By not trying to reduce pension costs, the state is taking money away from health care, education and other public services, he said.

An aging work force has caused pension costs to soar across the country, for teachers as well as other public-sector employees. Some states are reducing benefits or turning to 401(k) plans, others are increasing the amount employees put into the plans, and still others are increasing taxes to cover the costs.

Along these lines, Virginia Gov. Bob McDonnell has called for state employees to increase their retirement contributions from 5 to 6 percent for the next two years. He also proposed creating a new hybrid plan that is a combination of a 401(k) and a pension.

Reform is a slow process because it is hard to change policies for long-time employees and current retirees, said Robert Pozen, a senior fellow with the Brookings Institution and senior lecturer at Harvard Business School.

Though Maryland increased the amount employees contribute into the plans from 5 to 7 percent last year, the change had minimal effect.

“There’s nothing we could do to the benefit that would instantly transform the liability because so much of it relates to the past and not the future,” said Warren Deschenaux, director of the Office of Policy Analysis in the Maryland Department of Legislative Services.

For many states — Maryland included — the problems are the result of not contributing enough money to the pension fund each year. Nationally there is a $660 billion gap between what states should have paid and what they actually did, according to a report released last year by the Pew Center on the States.

“Unfunded liabilities grew over the past decade because states kicked the can down the road,” said David Draine, a senior researcher at the Pew Center on the States. “But the longer you kick the can down the road, eventually you run out of road.”

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