Part of Maryland pension hike to go toward balancing state budget

April 14, 2011|By ANDREW SCHOTZ |

A major concern in the just-adjourned Maryland General Assembly session was how to tackle an estimated $19 billion unfunded liability in the state pension system.

As elected officials tried to close the gap and keep the benefit system intact, one change they approved was an increase in employee contributions.

Instead of the current 5 percent, all employees will now contribute 7 percent of their salaries.

However, about two-thirds of that new revenue is expected to go to the general fund, not the pension fund.

The state Department of Budget and Management has estimated that the extra 2 percent of contributions will generate about $185 million in fiscal 2012, said Michael D. Golden, a spokesman for the Maryland State Retirement and Pension System.

Of that new revenue, $120 million will go to the state's general fund, said Shaun Adamec, a spokesman for Gov. Martin O'Malley.

O'Malley proposed redirecting $120 million to the general fund in fiscal 2012 and $60 million in fiscal 2013, but the legislature made it $120 million for each year, Adamec said.

O'Malley also proposed giving employees two choices: either pay 5 percent and have the multiplier for determining their pensions dropped from 1.8 times their years of service to 1.5, or increase their contribution to 7 percent and keep the multiplier at 1.8.

The legislature approved a 1.8 multiplier for current employees and 1.5 multiplier for new employees.

Other modifications approved this year include increasing the retirement age from 55 to 60, increasing the vesting period from five to 10 years and creating a "Rule of 90" that requires a retiree's age plus years of service to be at least 90. Those changes affect new employees, but not current employees.

Maryland's pension system was projected to be funded at about 59 percent in 2012. Eighty percent is considered safe.

Sen. Christopher B. Shank, R-Washington, said the state clearly needed to do something to address the liability gap; he supported increasing the employee contribution to 7 percent.

But he called funneling a majority of the new money to the general fund "unconscionable."

"That's just more of the same of balancing the budget on the backs of employees," Shank said.

Del. Andrew A. Serafini, R-Washington, for whom pension reform has been a main focus in Annapolis, said a state attorney general's opinion shows that redirecting the revenue appears to be legal. In fact, it's commonly done to funds for transportation projects and the Chesapeake Bay.

However, Serafini said he thinks it's wrong.

"If we need money, I'd rather see us cut spending," he said.

Adamec said O'Malley's objective was to make the pension system more sustainable and maintain defined benefits, both of which were accomplished.

"This type of challenge has got to be looked at long term," Adamec said.

"That was a decision made in preparation for the future," Del. John P. Donoghue, D-Washington said, calling the revenue split "a little bit of a defense mechanism."

The governor and legislature had to work on both the pension-system gap and an estimated $1.6 billion structural deficit in the budget.

When the economy improves, lawmakers can revisit the pension system for other possible changes, Donoghue said.

"I think it was a very wise move on the part of the financial experts who do this for a living," he said.

Pension perspective

Del. Galen R. Clagett, D-Frederick, a member of a House Oversight Committee on Pensions, said he didn't agree with all of the changes — he preferred keeping the multiplier at 1.8 for all employees and wanted to phase in the 2 percent contribution increase.

Still, he said, perspective is important.

The state is putting close to $1 billion into the pension system and protected much of the existing structure, including defined benefits, he said.

"If the Senate had its way, we'd have dumped a big chunk (of the pension costs) on the locals," Clagett said, referring to an early proposal to make counties share the cost of teacher pensions.

Clagett said he understands teachers' concerns — he was a teacher, then a principal, in Frederick County, decades ago, when they were fighting for insurance coverage, binding arbitration and grievance rights.

"I've been part of that struggle," he said.

The American Federation of State, County and Municipal Employees in Maryland spoke strongly against various pension changes this year.

The union, which represents thousands of state workers, thought it was "finally seeing the light" after years of furloughs and pay cuts, said Sue Esty, AFSCME's assistant director in Maryland.

Then came the pension modifications.

Esty said the union was glad that the correctional officers' pension system was protected from increased contributions and decreased benefits, but was concerned by what was changed for others, including a loss of benefits for new employees, creating a two-tiered system.

Shifting revenue from the higher employee contribution to the general fund is "more than a little problematic," she said.

Esty said AFSCME wants the state to approach the problem differently, by eliminating tax breaks for millionaires and corporations.

"This is going to be a worse problem next year," she said.

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