A massive shortfall in Maryland’s state employee pension system threatens to drown taxpayers in retiree debt, according to a Sept. 29 study by the Maryland Tax Education Foundation. As of June 30, the shortfall had reached $15 billion — more than twice the state’s entire general obligation debt. Drastic changes must be made now to avert a financial catastrophe. Although the Maryland State Pension Fund’s asset allocation is similar to other states, it has significantly underperformed them by about $2 billion over the last 10 years, Jeffrey Hooke, author of “Security Analysis on Wall Street” and MTEF’s volunteer chairman, told The Examiner. But what really worries Hooke is assumption by the fund’s managers that it will earn 7.75 percent over the next 30 years. If those rosy assumptions are not realized, and the fund only manages to earn a more realistic 6 percent, the pension shortfall will balloon to $20 billion — in addition to $15 billion in unfunded health benefits for state employees.
The pension fund has $32 billion in total assets, so a $15 billion shortfall puts it well within the danger zone. Taxpayers would have to contribute up to $2 billion more per year to make up the difference, Hooke says. That’s problematic, because Maryland taxpayers already resent being forced to downscale their own retirement plans to cover the cost of their public servants’ extravagant benefits.
Hooke recommends that the fund, which is administered by a Board of Trustees headed by State Treasurer Nancy Kopp and State Comptroller Peter Franchot, get rid of the 180 or so investment managers whose dabbling in high-risk leveraged buyouts and hedge funds failed to meet their own benchmarks, and put the fund well behind its better-managed peers. Maryland residents paid an estimated $140 million per year in fees to investment managers who have cost the pension fund $3.2 billion since 2000.
However, the next step, as Hooke points out, requires inflicting political pain. The pension fund must cut benefits, steer new employees to a defined contribution plan, extend the retirement age, and/or increase state employee contributions. Raising taxes on state residents who have to fund their own retirements should not be an option. For decades, Maryland politicians padded payrolls and promised state employees lavish pension and health care benefits that now cannot be sustained without massive tax increases. It’s time for the politicians in Annapolis to craft an affordable new state employee pension system before the old one literally bankrupts Maryland.
