The Maryland Public Policy Institute
MPPI IN THE NEWS
OCTOBER 1, 2012
Maryland counties are funding only about 50 percent of their retiree pension and benefit systems, according to a study by the Maryland Public Policy Institute, in part because almost no local money is being spent on some post-employment benefits.
The study — based on data from counties’ 2011 Comprehensive Annual Financial Report — shows that, on average, about 75 percent of local jurisdictions’ pension plans are funded. But most counties have allowed more than 90 percent of post employment benefits — such as health care and life insurance — to go unfunded.
“That’s the scary part. A lot of people are talking about pensions being underfunded, but to me the scarier bit is the other benefits,” said John J. Walters, the researcher who conducted the study. “It’s not that they’re underfunded, it’s that they’re just not funded.”
In most counties, that can mean tens of millions of dollars in unfunded liabilities.
Pensions serve as a dedicated source of income for retirees, with employers and employees investing money into a plan over the course of employment. While many private sector companies work under a defined contribution system — the final amount of money is dependent on the market — public employees receive defined benefits, a guaranteed amount of money regardless of the return on original investment.
In a weak market, that makes some public pension systems short on cash.
Walters said that while a great deal of attention has been given to state and federal governments’ struggles funding employee retirement packages — specifically pensions — post-employment benefits have become another serious problem.
“We didn’t expect them to grow to the levels they had grown,” he said, alluding to higher health care costs and employees living longer. “They have eclipsed necessary expenditures for pensions.”
Russell R. Wermers, an associate professor of finance at the University of Maryland, College Park, said that if the analysis is correct, it indicates an over-emphasis on propping up county pension funds while allowing other benefit accounts to languish.
“It seems impossible. I’ve never heard of that level of under or unfunding,” said Wermers, who lists pension funds among his expertise. “It’s very possible that all the attention has been paid to the pension plan … at the cost of leaving the less visible things out.
“It’s really playing a little bit of a shell game, in that the overall funding of all the plans isn’t really improved. I think that’s probably very likely.”
Not that the county’s pension systems are in great shape either, Wermers said. At about 75 percent funding, “that’s when a plan like that really starts getting in trouble.”
On average, county pensions are underfunded by 24 percent, with the worst-off jurisdiction being St. Mary’s County (56 percent) and best being Worcester County, which has 136 percent of the money needed to back its pension fund.
But Christopher B. Summers, president and founder of the Maryland Public Policy Institute, said there is need for total pension reform at every level of government. The state has tried to tax its way out of an underfunded system, but that won’t work long-term, he said.
“This is not a Republican or a Democrat issue, this is a numbers issue,” Summers said. “Maryland is not going to be able to tax its way out of this. I think there are some very difficult political decisions to reform this.”
That probably means reducing the quality of benefits offered to public employees, he said, a policy decision that would be tremendously difficult to make because of Maryland’s influential public employee unions, including police and teachers.
But, he said, pensions are the “fiscal tsunami that will probably really decimate a lot of county budgets.”
First and foremost, Summers said defined benefits systems should be abolished and replaced with defined contribution systems, a move many private sector employers made long ago. Next, he said, benefits need to be re-examined.
“In Maryland they’re not Cadillac health plans, they’re more like Rolls Royce,” Summers said. “These benefits need to be scaled back. These employees need to be required to pay a lot more into their plans.”
That, he said, would be a start toward making retirement systems more solvent. Walters, though, said far more sweeping change would have to happen.
“Our purpose was to illustrate that this is not just a federal government or state government issue,” Walters said. “This goes down to pretty much the lowest levels of state government. And we can’t cover them. And it’s not getting easier.”
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