“Pain,” “despondent,” “gloomy,” “grappling,” “hard choices,” “wrestle,” “damage,” “slashed” are a few of the words used by reporters and elected officials to describe nearly $380 million in recent cuts to Maryland’s fiscal 2010 budget. Measures taken in the fall 2007 special legislative session were greeted with similar bloated prose. In both cases, the budget cuts and taxes were necessitated by unrestrained expenditures and shortfalls in anticipated revenues. As we’ll see, neither exercise really faces the future.
Modest budgetary deprivations may be austere for the “rich state” Maryland politicians constantly invoke. But, compared to the “wrestling” and “hard choices” that lie ahead for our legislature, they may look like Hershey’s Kisses for the legions of Maryland job holders who escape Maryland’s high costs by living in Pennsylvania.
Recommended Stories
Despite the massive tax increase imposed during the special session, unmentioned is a colossal yet little known unfunded liability that will saddle Maryland taxpayers for decades and potentially jeopardize Maryland’s prized Triple A bond rating.
Maryland’s Blue Ribbon Commission to Study Retiree Health Care Funding Options reported in July 2007 that Maryland’s unfunded retiree health care liability is about $30 billion — $16.2 billion for the state and $12 to $14 billion for the state’s 23 counties and Baltimore City. These liabilities may represent as much as $14,420 in debt for every Maryland household or $5,340 in debt for every person in the state. Nationally, according to the equity research, accounting, and tax firm Credit Suisse, the tab is about $1.6 trillion in unfunded retiree health care liabilities and other non-pension, post-employment benefits among the states and local governments.
Maryland is among 18 states with obligations exceeding $10 billion. Because of preliminary disclosure of these unfunded liabilities, only recently have officials even known the size of these obligations. Further reporting is due this November or December.
Where’s this info been hiding out? In accounting terms, this money, which is owed by taxpayers as guaranteed by state constitutions, has been camouflaged by something politicians euphemistically call “pay-as-you-go.” This method allowed legislators to postpone revelation of the staggering costs until retirement. But a rule put into effect for states in 2007 by the independent Governmental Accounting Standards Board (GASB)*established a more transparent “accrual” method of accounting. Under the new rule, government officials will now have to calculate their unfunded health care liabilities and report the cost of benefits as an expense during the years in which an employee provides services in exchange for future benefits. In other words, every dollar of promised benefits will be accounted for as its accrued —not ignored until an unspecified future when the liabilities will have to be paid to discharge any obligations.
The accrual accounting method is the same used by the private sector. Yet, there’s still a major difference. Unsustainable overhead or legacy costs imposed by labor and agreed to by management will greatly diminish or sink a private sector enterprise. But not so with government, which has few checks and balances to personnel growth and costs.
In the recently published “While America Aged,” bestselling author Roger Lowenstein writes “…the states and localities, which have promised pensions to millions of present and future retired policemen, teachers, clerical workers and others, are hundreds of billions of dollars behind on their payments to state pension funds.” The deficits, Lowenstein believes, “…will require … layoffs, budget cuts, and higher taxes in a majority of states for decades ….” However, soon enough the pension problem in Maryland will be compounded by the state’s much larger retiree health care liabilities. While over the years the state has amassed $44 billion in pension liabilities for its workers, according to The Pew Charitable Trusts’ Center on the States, Maryland has already funded roughly 82 percent of that bill-— leaving about $8 billion in remaining unfunded pension liabilities. But if you add that 8 billion in known pension liabilities to the roughly 30 billion in heretofore unknown and unfunded health care liabilities, Maryland’s options are limited.
State legislators can either (a) raise taxes to cover these horrendous health costs; (b) impose savage cuts in health benefits; or (c) make structural changes that limit taxpayers exposure while harnessing free market forces to control costs. Structural changes make the most sense— particularly a transition from defined benefit to defined contribution — but that will require brains, guts, and imagination. In any case, there is no way Maryland state legislators can shirk responsibility. Ball’s in their court.
*The GASB is a widely respected independent organization that establishes and improves standards of accounting for U.S., state and local governments.
Robert O. C. Worcester, life-long Marylander, educated at The College of William & Mary and The Johns Hopkins University, has been president of MBRG since its formation in 1983.
