ANNAPOLIS — The House of Delegates and Maryland Senate this past week both voted to cut pension benefits for state teachers and employees while raising contribution rates and retirement ages, ostensibly to cure a massive $18 billion underfunding of the pension system.
But millions of the savings from the reduced benefits are not going to shore up the pension plans at all. Instead they will funnel money into the operating budget, a prospect that has drawn fire from liberal and conservative lawmakers and the teachers union, as well as strong objections from the head of the retirement system.
The pension money is “going into the General Fund in the near term and the long term,” Sen. Paul Pinsky, D-Prince George’s, complained in Senate debate on the budget Tuesday night. Pinsky, who works for the teachers union in Montgomery County, said the pension cuts undermine efforts to attract “the best and the brightest” to teach in public schools.
Senate Republican Whip E.J. Pipkin of the Upper Shore offered an amendment to eliminate a provision in the Budget Reconciliation and Financing Act that allows the governor to put $120 million less into the pension than the annual required contribution as certified by the Maryland State Retirement and Pension System. Pipkin said because of the reduced annual contributions, “we continue to have a significant hole” in pension funding. Pipkin’s amendment failed in 15-32 vote.
In a letter to the Senate Budget Committee chairman last week, Dean Kenderdine, director of the Maryland State Retirement and Pension System, said limiting the funds contributed to the system “simply defers payment of those costs to later years and assures that the total cost to the state will be much greater.”
The pension plans proposed by the governor and approved by both the House and Senate would make cuts to the system, allowing it to reach 80 percent funding by 2023. It is now only 64 percent funded.
“The House and Senate have compounded it by not addressing what everyone said is the problem: sustainability,” said Sean Johnson, managing director of political and legislative affairs for the Maryland State Education Association.
Funding to reinvest in the system has been the top request of retirement system officials this year. It lost a fifth of its value in fiscal 2009, but had a 14 percent return on investment last year. Most of the system’s value comes from investment earnings, but the more money put into the system, the quicker it is set on the path to sustainability, officials said.
During the House markup of the budget, delegates placed two caps on funding going back into the system. One limits state contributions to 20 percent of the total state payroll, which was rejected by the Senate. The other cap limits the annual required contribution to $300 million a year.
Kenderdine’s letter states that the board of the retirement and pension system views the cap on employer contributions as a “statutory obstacle” to the state’s being able to make the required 80 percent contribution to the retirement system.
Kenderdine told MarylandReporter.com that according to numbers certified in December, the amount contributed to the retirement system is about 16 percent of current payroll. According to projections done by the Department of Legislative Services, if the economy continues to grow, the state contribution should stay beneath 20 percent of payroll in the conceivable future. If the economy tanks again, the retirement system could feel the strain.
“We are hoping in the conference [committee on the budget] that the Senate’s position will prevail,” Kenderdine said.
The Senate Budget and Taxation Committee left the $300 million reinvestment cap in place.
If it becomes law, the cap will not affect the retirement system immediately, Kenderdine said. According to projections run by the Department of Legislative Services, the system will reach $300 million in savings by fiscal 2018 or 2019.
Current law has no reinvestment or contribution limits for the retirement system. Johnson, of the state education association, said that if the General Assembly didn’t place caps on the system, it would probably get to 80 percent funding several years earlier.
The retirement board of trustees also opposed the General Assembly transferring twice as much money as initially planned to the general fund in 2013. Gov. Martin O’Malley’s budget proposal uses $120 million from the retirement fund to balance the 2012 budget, and planned to use $60 million from the retirement fund in 2013.
Both the House and Senate want to take $120 million from the retirement fund and move it to the General Fund in 2013.
At the House Appropriations Committee markup, Del. Melony Griffith, D-Prince George’s County, chairman of the pension oversight subcommittee, said enough cuts had been made to ensure the pension system would use less money, and a larger transfer to the General Fund would help to build more stability for the state budget as a whole.
The state education association proposed a plan last week to combine higher contributions and lower cost-of-living adjustments than those offered by the General Assembly’s plans. Johnson said their cuts are “less draconian,” but they do not propose to limit the amount of state money that goes to the retirement system in any way.