ANNAPOLIS – Budget analysts warned Maryland officials Tuesday that the state’s $33 billion in unfunded pension liabilities will continue to balloon out of control unless the state enacts immediate and drastic pension reform.
“We really can’t expect to invest our way out of this,” Maryland state policy analyst Michael Rubenstein told a state-appointed commission studying pension reform. “The problem is getting worse and it’s too late to address the funding gap of fiscal 2012.”
Maryland’s pension liabilities — $18 billion the state owes to current and future retirees in retirement benefits, and $15 billion in health benefits — are currently funded at 64 percent. The last time the funding level was that low was in 1980, Rubenstein said.
“And it took us 20 years of really impressive market performance to get back to full funding,” he said. Maryland’s pension funding level has plunged since 2000 due to poor market performance and decisions by the state legislature to temporarily underfund the system during budget cuts.
State workers’ pensions were protected from the poor economy by a funding formula that offsets huge investment losses by rolling them into the state’s total liabilities, with the $33 billion expected to be paid to retirees over the next roughly 25 years.
But that mechanism also prevents quick growth — meaning even a soaring market can’t hoist Maryland out of the hole anytime soon.
For example, in fiscal 2010 the pension system’s investment return grew 14 percent after two years of losses. But the pension’s funding level dropped one percentage point.
“We’re going to have to fund the liabilities much more aggressively,” said commission member George Roche after hearing the dire assessment. He questioned why the state wouldn’t pay its annual pension dues in full — or even overfund them — to solve the problem.
Over the past two fiscal years, the state has plugged pension payments with more than $350 million in federal stimulus dollars. Now the federal spigot is dry, and the state is facing a roughly $1 billion shortfall in its general fund, including pension liabilities, in fiscal 2012.
As other states across the country grapple with similar pension problems, some are switching new employees to a 401(k) system, which is cheaper for employers and shifts investment risk onto employees. Others are reforming their current systems by cutting benefits for new employees — which Rubenstein said wouldn’t help the system unless hundreds of new hires replace current workers.
Former Maryland Republican Gov. Bob Ehrlich, who is trying to unseat Democratic Gov. Martin O’Malley, has proposed shifting to a 401(k) system. O’Malley supports reforming the current system, depending on what the commission recommends.
The panel won’t make its final recommendation until June, after the next legislative session ends. An interim report is scheduled to be issued in December.
