Delegate Tony McConkey's Official Blog

Maryland Using Pension Money To Balance The Budget

pension-money-balance-the-budgetGovernor O’Malley just released his 2015 budget. In it he makes many claims. One is that he has cut $9.1 Billion from the budget during his tenure despite the state budget increasing by $9.6 Billion over the same time.

Also he claims that his 2015 budget does not include a new tax, but by raising state employee contributions for retirement and then taking $179 million out of the retirement system he is very much imposing a new tax by using pension money to balance the budget.

Mar 10, 2014 – Senate Committee Makes Extra Cuts To Pension Payments – Rptr
Mar 7, 2014 – $300M In Promised Pension Funds On Chopping Block – Rptr
Mar 1, 2014 – O’Malley Pension Proposal Breaks Trust With State Retirees – Post
Feb 26, 2014 – Treasurer And Comptroller Fight Using Pension To Balance Budget – Sun
Feb 9, 2014 – Governor O’Malley’s Latest Pension Grab – Rptr
Feb 2, 2014 – State Treas Kopp Opposes Using Pension Money To Balance Budget – Rptr
Jan 20, 2014 – Budget Analyst Calls For More Cautious Approach To Budget – Post
Oct 30, 2013 – Maryland Pension Shortfall Climbs 72% In Five Years – MDPolicy

(Scroll down for addtional articles)

Broken Pension Promises are Nothing New

by Gabriel J. Michael, Maryland Policy Blog January 31, 2014

The news that Governor Martin O’Malley’s new budget proposes to cut $100 million in funding to the state pension system came as a surprise to many. Union leaders have been taken aback by what they view as the state reneging on a promise made during the 2011 pension reforms, and the system’s Board of Trustees opposes the governor’s proposal.

Let’s recap: in 2011, the General Assembly increased employee contributions, vesting periods, and made other changes to the state pension system. We were told that these changes would lead to a funding level of 80 percent (the minimum for a system to be considered healthy) by 2023.

In 2013, the General Assembly finally passed legislation to begin phasing out the brain-dead “corridor funding” method that has consistently underfunded the pension system for a decade. However, the legislature also cut $100 million from the state’s portion of funding to the pension system. We were told that these changes would delay the funding goal by one year, i.e., we would reach 80 percent by 2024.

This year, Governor O’Malley’s budget proposes to cut $100 million from the state’s portion of funding, once again delaying the funding goal by a year. Now we’re told the pension system will be 80 percent funded by 2025.

Notice a pattern here?

I did, and I said as much in a report published late last year, in which I placed blame for Maryland’s pension woes squarely at the feet of political leaders, who “are unwilling or unable to consistently allocate the required funding for pension systems on an annual basis.”

In response, I was attacked by the pension system’s management, who accused me of “cherry pick[ing] statistics and pull[ing] numbers out of the air.” (I later received a written apology from the system’s spokesperson). In November, pension system management proudly cited the “80 percent funding by 2024 statistic.” Yet here we are, just three months later, and already an elected official has made that statistic obsolete.

Union leaders and pension system management should have seen this coming. The same thing happened last year, and if Governor O’Malley gets his way, the $100 million cut in funding will be permanent. If this is how a Democratic governor who passed key pension reforms treats the pension system’s health, how can state employees or the public at large have any confidence in projections of future funding levels?

Keep that in mind next time someone makes a promise about what the status of the pension system will be ten years in the future.


Unions, Pension Board Unhappy O’Malley Cut $100M In Promised Payment To Retirement Fund

By Len Lazarick, Maryland Reporter Jan 17, 2014

The largest unions representing state workers and public school teachers are upset at Gov. Martin O’Malley’s decision to permanently cut $100 million from extra payments into the state pension system. The money came from additional employee salary deductions required by a 2011 pension reform, and was intended to help cure underfunding in the pension system.

The Board of Trustees of the State Retirement and Pension System, headed by State Treasurer Nancy Kopp, is also opposed to reducing the promised $300 million payment down to $200 million. This delays the goal of funding of the state pensions system at 80% by a full year, from 2024 to 2025. The pension system was 100% funded 12 years ago, but 80% is the accepted standard for public systems. raised the issue at the governor’s news conference on his proposed budget Wednesday. O’Malley had not mentioned cutting the pension payment in his presentation, even though it is listed as the largest spending reduction he is proposing to balance next year’s budget.

After his explanation of the change, O’Malley was specifically asked if the public employee unions had signed off on the reduction. The video of the Jan. 15 news conference shows O’Malley turning to Chief of Staff John Griffin and Budget Secretary Eloise Foster, and both nod their heads indicating the unions had agreed. (The video is in the video library under Jan. 15, 2014 and the exchange takes place around minute 41.)

Unions Unaware Of The Change

On Thursday, representatives of the American Federation of State, County and Municipal Employees and the Maryland State Education Association told a reporter that they were not aware of the $100 million cut in this year’s pension payment. The union representatives also seemed totally unaware that O’Malley wanted to make the cut permanent by changing the law in the Budget Reconciliation and Financing Act of 2014 (page 11) that he introduced Wednesday to implement the budget.

“AFSCME members don’t agree with the state’s decision to underfund pension contributions,” said Patrick Moran, president of AFSCME Maryland. “We’re hopeful the state will balance its budget and make its pensions contributions — just like state employees do every year.”

But the permanent cut is exactly what Foster recommended in a report sent Wednesday to the budget committees and the Joint Committee on Pensions.

Foster’s report also includes the position of the pension board; it “strongly recommends” that the state continue to make the $300 million payment.

The board said the savings achieved by restructuring benefits should be plowed back into the pension system, which is currently only about 65% funded.

“It should be noted that of the total $300 million reinvestment, approximately two-thirds is a result of the fact that the reforms increased employee contributions,” the board said.

The 2011 pension reform legislation, which O’Malley pointed out caused “the largest public employee protest” of his administration, raised employee contributions from 5% to 7% of salary.

Cut Made To Balance Budget, Reduce Structural Deficit

At Wednesday’s budget rollout, from right, Gov. Martin O’Malley, Lt. Gov. Anthony Brown, Budget Secretary Eloise Foster, Chief of Staff John Griffin.

O’Malley said the proposed cut in pension payment was “due to more favorable actuarial forecasts.” But Foster’s report makes clear the motivation was to balance the budget this year and “improve budget sustainability by reducing the structural deficit.”

The cut in the pension payment will save the state $1.2 billion over the next five years. The state has not making its full annual required contribution established by the outside actuaries for more than a decade. Only last year did it approve a change to the funding method to address the shortfall.

The $300 million cap on reinvestment of pension savings was controversial in 2011 at the time the pension changes were passed. The teachers union wanted even more money put back into the system.


Editorial: Balancing The Budget With The Pension System

By Daily Record Staff, Jan 16, 2014

It was supposed to be a trade-off, a system of shared pain for shared gain. In order to ensure a solvent state pension system, employees would pay more and get less; the state of Maryland, in turn, would take the savings those changes generated and reinvest them in the plan at the rate of $300 million a year. Handshakes all around, and cue the parade.

That was the deal approved by lawmakers in 2011, and the state was as good as its word — for one year.

Reinvestment in the pension system was reduced in 2013 and again this year, under the budget announced Wednesday by Gov. Martin O’Malley. Instead, some $172 million will go back into the operating budget for other programs.

That proposal may look small in comparison to the $39 billion budget. However, it was the single largest piece in a package of $9 billion in deferrals, canceled plans and actual cuts in expenditures.

It is true that the governor is faced with an unenviable task. He must submit a balanced budget, no deficits allowed, year after year. However, he is given a good deal of leeway in defining the balance. Like a game of Jenga, the trick is to find and remove those pieces that won’t reduce the whole tower to a jumble of blocks on the floor — at least, not during your turn.

In that sense, back-to-back backtracking on the promised level of pension-fund reinvestment was not a bad move. The repercussions are not immediate: Unlike some states, Maryland is sticking with its traditional defined-benefit pension plan, and, despite the system’s underfunded status, no one has missed a check. The state is even sticking with its goal of 80 percent solvency, considered a sustainable level; under this year’s budget proposal, the governor says, the state needs just one more year to get there.

Even so, it’s a troubling move. The fact that the system was underfunded was documented by the Baltimore-based Calvert Institute and the Maryland Public Policy Institute, of Rockville, as far back as 2008. By 2011, when the legislative deal was struck, solvency had fallen to just 64 percent.

Under the 2011 deal, the system should have returned to 80 percent solvency by 2023. With the reduced level of reinvestment by the state, the target date has slipped to 2025 — assuming the economy does not thwart the plan.

The state’s workers are holding up their end of the bargain with higher contribution rates, longer vesting periods and capped cost-of-living adjustments. No one gave them the option of reducing their compliance by a third.

A deal that only one side honors is not a deal at all. The state needs to get back on track or pension-fund solvency will always be a decade away.

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