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State, local employees should keep watch over retirement funds

Originally published in the Herald-Mail

Economic & Fiscal Policy, Public Pensions

by Thomas A. Firey

OP-EDS

NOVEMBER 20, 2013 Bookmark and Share

The March 2011 rally had all the trappings of a major campaign event. A large, boisterous crowd of Maryland teachers and other public workers filled Lawyers’ Mall in Annapolis, chanting slogans and waving placards. Union leaders took turns at the podium, revving the crowd while TV cameras and reporters looked on. Finally, Gov. Martin O’Malley addressed the throng, telling them, “We are a great state … because our public employees do a good job every single day!”[1] The line drew the cheers that politicians covet and O’Malley left the stage to embrace the union chiefs and mug for photos.

Hard to believe, the event was supposed to be a protest against cuts to Maryland’s public workers’ retirement system that O’Malley signed into law. The Annapolis scene offered a remarkable contrast to what played out around the same time in Madison, Wisc., where arguably more modest cuts[2] resulted in angry demonstrations[3] and an attempt to recall the governor.

Perhaps Maryland workers were more accepting of the cuts than their Badger State brethren because of a better appreciation of fiscal reality: the state had promised its workers so much, yet had done so little to fund those promises that there was no chance they would ever be kept. Maryland public employees may have rationally accepted lower benefits in exchange for making those benefits more secure.

If that’s what workers were thinking in 2011, then they should worry about the findings of a new report by my Maryland Public Policy Institute colleague Gabriel Michael.[4] Using state and county government data on the conditions of their pension funds and reserves for other retiree benefits (notably health care), Michael finds that, for the state pension system alone, there’s a nearly 37 percent long-term deficit, representing a $20 billion shortfall on promises of future benefits.  Non-pension retiree benefits, which the state and most counties have only recently begun saving for, are underfunded by nearly 98 percent, representing an additional shortfall of nearly $10 billion. Michael notes, “With a few exceptions, the situation in many Maryland counties is just as dismal.”

In Washington County, the situation is better—but still not good. The county pension fund’s long-term deficit is almost 29 percent, equal to a little over $24 million. Non-pension retirement benefits for county employees who don’t work for the Board of Education are underfunded by just over 50 percent (about $9.5 million), but school employees are underfunded by more than 85 percent (nearly $133 million). As troubling as those latter numbers are, Washington County is better off than most Maryland counties.

There are several reasons for the deficits. For one, to quote Michael, “political leaders are unwilling or unable to consistently allocate the required funding for pension systems on an annual basis”—or, put simply, politicians keep shortchanging the pension funds. Making matters worse, union leaders give far more attention to negotiating promises of good retirement benefits than to making sure the state and local governments live up to those promises.

Another reason for the deficits is that, until recently, the state and most counties have neglected saving for future non-pension benefits. Instead, they’ve found the money in each year’s budget to cover that year’s retiree costs. That strategy worked well when there was a relatively small number of retirees, but today’s much larger government work force makes that strategy dangerous.

A third reason for the deficits is that state and local leaders assume the pension and benefit funds will earn healthy investment returns. Yet, historically, Maryland has shown itself to not be a consistently good investor. As another recent Maryland Public Policy Institute paper by Jeff Hooke and Michael Tasselmeyer notes, Maryland (and many other states) hire high-cost investment managers to oversee the retirement funds, yet those managers have trouble earning returns as good as those received by ultra-low-cost index funds.[5]

State and local governments’ pension and benefit woes threaten public workers’ retirements, taxpayers’ finances and residents’ future government services. All Marylanders need to demand that state and local leaders make reasonable retirement promises to public workers, and then live up to those promises.

Thomas A. Firey is a senior fellow with the Maryland Public Policy Institute and a Washington County native. The reports cited in this column can be downloaded from MPPI’s website, www.mdpolicy.org.

[1] Aaron C. Davis. “Maryland Teachers, State Employees Protest Budget Cuts, Pension Changes.” Washington Post. March 14, 2011.

[2] Thomas A. Firey. “Where’s the O’Malley Recall?Policy Blog. Maryland Public Policy Institute. June 14, 2012.

[3] National Journal. “The Storming of the Wisconsin Statehouse.” Feb 17, 2011.

[4] Gabriel J. Michael. “Perpetual Shortfall: Maryland’s Pension and Benefit Funds.” Maryland Public Policy Institute. Oct. 30, 2013.

[5] Jeff Hooke and Michael Tasselmeyer. “Wall Street Fees and the Maryland Pension Fund.” Maryland Public Policy Institute and Maryland Tax Education Foundation. Aug. 3, 2012.