Stuck in a Growing Pension Hole, Maryland Keeps on Digging

The latest chapter in the drama of public pension debacles is unfolding in Maryland, where Democratic lawmakers and Republican Gov. Larry Hogan are teaming up to spend money on salary increases and other purposes while reneging on a four-year-old deal to address the state’s slowly building public pension crisis.

A nail was hammered into the coffin of the pension deal this month, when the legislature, as part of a much larger budget bill, decreed that only $75 million would go toward catch-up funding for the Maryland State Retirement and Pension Fund, just a quarter of the $300 million it had agreed to contribute annually. The contribution will come in the fiscal year beginning on July 1.

The state already was deep in the hole, according to assessments by Moody’s Investors Service and other analysts. Last July, Moody’s reported that the Maryland system was only 65.5 percent funded—and thus had unfunded liability of $20.7 billion. The state’s pension burden, calculated as a share of government revenues, was the seventh-highest in the nation, Moody’s said—at more than twice the median burden among the 50 states.

At present, the system has obligations to 382,000 current and future retirees from public agencies around the state. About 140,000 retirees—teachers, judges, state police and others—now draw roughly $3 billion a year from the fund.

A Long Decline

At the turn of the century, the Maryland system was fully funded. And for most of the decade revenues were strong, bolstered by a rising stock market. As in other states, officials took an optimistic view, projecting that sunny skies would never end. Beginning in 2002, the legislature began skimming actuarially needed contributions, using the money for pay raises and new or expanded programs.

Of course, the deluge came in 2008, when the stock market collapse cost the pension fund more than $5 billion in assets.

That put the Maryland system deep into a hole that a gradually recovering stock market could not fill up. So in 2011, then-Gov. Martin O’Malley negotiated a grand bargain aimed at bringing the pension fund back to 80 percent funding by 2023.

In the bargain, state workers agreed to pay 7 percent of their earnings into the pension fund, up from 5 percent, and their unions agreed to lower benefits for new hires. In return, the state government would contribute $300 million a year over 20 years to get the fund back to 80 percent of funding requirements. That would be better than the two-thirds funding the system had, but still not enough. At 80 percent funding, private pension systems are considered “at risk” by ratings agencies. (A year later, the state offloaded teacher pension costs to counties where they are now burdening the budgets of jurisdictions like Prince George’s County.)

O’Malley reneged on his own deal in 2014, allotting one third of the $300 million to cover other items he wanted to fund. The Washington Post editorialized at the time that this was “undercutting not only his own credibility but also the state’s” reputation in the bond markets.

This year, the situation deteriorated further. In his budget for the fiscal year beginning on July 1, Hogan proposed a pension catch-up contribution of $150 million—only half the amount agreed to in 2011. But the Democratic-controlled legislature, adopting growth assumptions that are laughable in actuarial circles, decided that it would cut that amount in half, allotting only $75 million to the pension fund. Hogan has declared he won’t spend $68 million the legislature ticketed for support to some of the state’s schools, and will instead give it to the pension fund. But his authority to make the transfer is under hot dispute.

Again, The Washington Post teed off on the politicians in Annapolis. “The Democrats’ hypocrisy is thick, and their arguments are thin,” the paper said in a May 26 editorial. “They rest mainly on the supposition that the $45 billion pension fund is already well on its way to recovery and that everyone should just relax if cash is diverted from it to other needs.”

In fact, Maryland Comptroller Peter Franchot has estimated that the legislature’s failure to live up to the 2011 agreement will ultimately cost Maryland taxpayers an extra $2.5 billion.

Experts’ Views

Outside experts agree that Maryland is digging itself deeper and deeper. Professor Alicia Munnell, who held high office at the Federal Reserve, the Treasury Department and the Council of Economic Advisers before becoming director of the Center for Retirement Research at Boston College, told Route Fifty in an e-mail:

When states make pension deals with their employees, they need to stick by them. In 2011, Maryland public employees agreed to up their contributions and to link their cost-of-living adjustments after retirement to the performance of the investment portfolio.  In return, the state agreed to reinvest a portion of the savings in the pension fund in the form of higher contributions.  The employees have lived up to their half of the agreement; the state has not. The Maryland pension plans are underfunded and need the additional money.  Banking on the stock market to solve the problem is a risky proposition.  In New Jersey, employee sued to get promised payments and won in court.  It would a shame for Maryland to go this route.  

Mark Pisano, a professor at the University of Southern California’s Sol Price School of Public Policy, drew parallels with the California pension crisis described earlier this week in this Route Fifty examination of the ongoing pensions mess in the Golden State.

Said Pisano, who served for 31 years as executive director of the Southern California Association of Governments, the nation’s largest regional planning agency:

California jurisdictions, like the State of Maryland, are facing similar dilemmas: using budget surpluses to address existing  priorities and not dealing with long term pension obligations. The issue is not partisan but rather a matter of recognizing  economic realities: long term commitments need to be paid for and business cycles do exist.  Governor Jerry Brown is leading the quest to confront California’s daunting pension shortfall, but state and local legislative pressures are an obstacle. Maryland’s legislature would be well served to look at the California debate and both states would be well served to continue dealing with economic realities.

Read recent Route Fifty coverage of pensions in California, Illinois and Oregon.