The Maryland Public Policy Institute
I hate to be the bearer of bad news. But the 6 percent drop in the Dow Jones Industrial Average in May, its worst performance in two years, and rising unemployment are not just bad news for people's retirement accounts. It means higher taxes for Marylanders — after yet another tax hike this month and a slowing economy.
The reason: The state retirement system depends on a 7.75 percent annual return in order to meet its obligations to state workers. If the $37 billion fund does not meet its target, it ultimately leaves taxpayers on the hook to make up the shortfall. And it's a big one. As of last year, the fund had about 64 percent of the money it needed to meet future obligations, according to its own math. (Using a realistic, lower rate of return, as businesses are required to do, would make the obligation billions larger and massively increase the yearly contribution required by taxpayers.) When the fiscal year closes at the end of this month, we'll see where it stands. Recent market movements are not a harbinger of good news. Neither is the fund's track record. It earned 20 percent in fiscal 2011, but the compound annual return over the past 10 years is 5 percent.
And shifting part of the cost of teacher pensions to the counties and Baltimore City over four years, as legislators did during the recent special session of the General Assembly, is not going to save anyone from funding problems; it just moves a chunk of the burden to the local level. Making counties accountable for the salaries they offer to teachers is right. But local governments will not come out "way, way ahead," as this paper editorialized. Higher taxes passed this year will help counties pay for the shift in the same way a Band-Aid can stem the bleeding of a severed limb.
As The New York Times quoted New York City Mayor Michael Bloomberg, "If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent return on your money for the rest of your life, you take it and just make sure the guy's name is not Madoff." And it's not just inflated estimates of returns that make the obligations much larger than reported. Accounting rules allow states to assume they will owe less than the true cost per person. Combined, expenses for retirement benefits are ballooning out of control across the nation, pitting government employees against the residents who pay their salaries in many communities. In one example, voters in San Jose, Calif. went to the polls Tuesday to vote on whether to reduce benefits for all city employees. (Results were not available by the time of publication).
Northwestern University's Joshua Rauh and the University of Rochester's Robert Novy-Marx estimate in a May paper that each household in Maryland will owe an extra $818 every year over the next 30 years to fully fund the system. Note that they say "household," not taxpaying household, so the figure is actually much higher for those who pay the bills in this state. Nationally, the figure is $1,385.
They also note that living in high-taxed states — a category Maryland occupies — impacts the price tag of benefits because taxes affect job growth and migration. Maryland's statistics are not great in either category. Federal labor statistics compiled by Governing magazine show that Maryland lost 58,000 private-sector jobs from January 2008 through this April, while adding 1,100 state and local government jobs — meaning fewer revenue-generating people are carrying a larger public-sector burden. At the same time, Internal Revenue Service and Census data show thousands of people are leaving Maryland, an ominous portent about job opportunities in Maryland and the future price tag of state and local government benefits for each household.
State residents should expect higher property taxes in coming years or significant cuts to other government services to cull that extra $818 that Messrs. Rauh and Novy-Marx say is necessary just to pay for pension promises, even if no benefits are added. Add on the cost of maintaining public school spending at the same level each year, as required, and the ever-ballooning state budget, and it won't be just the "rich" making $100,000 per year who will be asked to pay more at every level of state government.
It will be almost everybody.