Maryland no longer can afford its generous pension packages for state employees and teachers, as the recession, expensive perks and years of underfunding have put it $33 billion in the hole, Maryland’s chief budget analysts are telling officials studying pension reform.
The state is paying roughly $2.3 billion into the system this fiscal year — which is only three-quarters of what it actually owes in pension and health care benefits to current and future retirees.
State teacher pension payments will grow 10 percent annually and its benefits contributions will grow 8 percent annually, while General Fund revenues — responsible for all teacher pensions and 60 percent of benefits — will increase only 5 percent each year through 2015, according to Warren Deschenaux, the state’s chief budget analyst. Virginia’s pension system is in better shape than Maryland’s, but the commonwealth also has chosen to delay payments. Virginia deferred $620 million in payments to its pension system in the 2011-2012 biennium, to be paid back over the course of 10 years starting in 2013.
The Pew Center on the States said it had “serious concerns” about Maryland’s pension system in a report released in February, while it said Virginia’s “needs improvement.”
The last time Maryland repeatedly failed to pay annual costs in full, 30 years ago, lawmakers scrapped the entire system — which was then 65 percent funded — and started over.
Starting in 1980, the state paid its annual pension bill in full, and by the turn of the millennium, the system was fully funded.
“It was a happy but fleeting time,” Deschenaux said.
Following the 2001 tech bubble, then-Maryland Gov. Parris Glendening submitted a budget short on pension money.
The General Assembly, legally barred from adding to the governor’s budget, adopted a formula for its pension contributions that allowed the state to shirk
on payments without alarming credit–rating agencies.
In 2006, lawmakers used their newfound funding flexibility to pass hefty benefits increases — including a retroactive bump for state employees costing $1.9 billion and teacher pay raises that more than doubled retirement costs over five years.
As pension costs multiplied, the 2008 recession consumed 20 percent of the pension system’s investment returns and state revenue dropped precipitously.
Maryland is now facing a pension system as sick as the one lawmakers gave up on in 1980, and the enormity of the problem is creating inertia.
Dozens of bills were proposed last year to help reform the system. None passed.
The only bill that made it out of committee would have put roughly 1 percent of the state’s $1.3 billion in teacher pension costs onto the counties. Teacher benefits have driven 60 percent of Maryland’s pension cost increases in the last three years.
The Senate passed the measure — which the public employees and teachers
unions vehemently protested — but the House shelved the proposal, and instead appointed a commission to study changes.
Unlike in Maryland, Virginia’s local boards of education are responsible for paying part of teacher pension costs.
“Our pension system is broken and it cries out for action and we really should not delay any further,” said Senate President Thomas V. Mike Miller Jr., D-Calvert and Prince George’s counties. “It’s gotta end, and it’s gotta end right now — this year.”
Miller said he wants to start reforming the system incrementally by addressing immediate costs this year.
But Senate Minority Leader Allan H. Kittleman, R-Howard County, is pushing for structural reform.
“We need to stop the bleeding right now,” he said, suggesting the state start new employees on a 401(k) plan instead of a pension plan.
The commission has a final meeting Monday before recommending action to the General Assembly.
“Hopefully we’ll have recommendations from the commission to work with, but if not, we’ll sail this ship alone,” Miller said.
