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Defined benefits survive in pension deal

ANNAPOLIS — Maryland lawmakers agreed Monday to state pension and retiree health benefit reforms needed to start addressing huge unfunded liabilities that would pose future financial problems if left unaddressed.

A panel of House of Delegates and Senate lawmakers compromised on a plan that aims to increase Maryland’s funding of its pension system from 64 percent to 80 percent by 2023, while softening the burden on retired state employees on a fixed income.

“That was our primary focus,” said House Speaker Michael Busch, D-Anne Arundel, referring to easing some changes for retirees that had been considered initially. “I think all in all, it was a very, very good compromise.”

The actions maintain the state’s defined benefit pension. The pension changes affect about 174,000 active state employees, including teachers, who comprise about 106,000 of the active employees affected by the changes. About 103,000 retirees are affected by the prescription drug changes.

Sen. David Brinkley, a Frederick Republican, said he would have liked to have seen stronger measures to move away from a defined benefit pension, but he said he believes the state is “moving forward in a decent way” that will make progress in the future.

“It certainly isn’t exactly where I would have taken it,” Brinkley said. “My first choice was to be perhaps far more aggressive with it — make it mirror more what’s available in the private sector, but I think the conference committee took some good steps.”

Maryland has $19 billion in unfunded pension liabilities and $16 billion in retiree health liabilities. A plan proposed by Gov. Martin O’Malley in January to begin addressing the daunting problem has been one of the toughest challenges this session, as the House and Senate wrangled over different changes to the plan.

Under the plan approved Monday, the amount state employees pay for retirement will rise from 5 percent to 7 percent, starting on July 1. Monthly premiums for health insurance rise from 20 percent to 25 percent, and a co-pay system is maintained.

The panel settled on retiree prescription drug changes that will raise out-of-pocket expenses, but not as much as had been considered by the Senate or O’Malley, a Democrat.

Out-pocket expenses are capped at $700 a year. That will rise to $1,500 for the retiree and $2,000 for a couple. The panel had been considering an out-of-pocket expense cap of $2,000 for the retiree and $3,000 for a couple.

O’Malley initially proposed a much steeper out-of-pocket expense cap for prescription drugs at $4,550 per retiree and $9,100 per couple.

All three proposals aim to shift retirees into Medicare Part D in 2020.

The panel also decided to create a cost-of-living adjustment for retired state employees. It would be capped at 2.5 percent in any year the state meets an investment return target of 7.75 percent in the pension system in a year when there is inflation. Otherwise, it would be capped at 1 percent. The Senate had considered cost-of-living adjustments of up to 2 percent.

Lawmakers also changed how much retirement benefits will be.

The amount will be determined by how many years an employee works, multiplied by 1.8 percent of current employees’ salaries. For new employees, the multiplier will be 1.5 percent.

“We would have liked to have kept the multiplier at 1.8 for everybody, but it just wasn’t feasible to do that and reach the 80 percent liability by 2023,” Busch said.

Sue Esty, assistant director of the Maryland chapter of the American Federation of State, County and Municipal Employees — the largest union for state employees — commended the panel’s action on prescription drugs. But she said the union will keep fighting for better benefits.

“The net result for state employees is that they’re going to be paying more to get their existing benefits, and for new hires they’re going to have to pay more to get less,” Esty said.

The plan also creates a “Rule of 90” to receive the normal retirement benefit. That means, if an employee retires before the age of 65 with at least 10 years of service, the employee’s age and years of service must add up to 90.

State employees hired after July 1 will vest in the retirement plan after 10 years, instead of five years. The plan extends the period before the maximum benefit is earned by new employees from 16 years to 25 years.

The plan allows state employees who qualify for the benefits but end up retiring from another employer to come back to receive the state benefit.

The pension plan does not apply to judges. The conference committee decided to allow the Judicial Compensation Commission to address pension reform for judges.