Maryland Commission on Employees' and Retirees' Benefit Sustainability
By Doug Prouty, President
Montgomery County Education Association
On behalf of
The Maryland State Education Association
Thank you for the opportunity to speak with you today. The members of MSEA appreciate your hard work to gain an understanding of the complexity of the issue that face us; the General Assembly, the participants in the state pension system, and those who fund it.
The Commission’s title rightly identifies benefit sustainability as the primary purpose of your work. There are some in this debate that define the problem as that of excessive benefits. The average annual benefit under the Maryland State Teachers Pension Systems was about $17,500 last year- hardly a lavish lifestyle to rely on in retirement. Nor is it the cause of the current problem.
To answer the question of sustainability, we must first understand how we got here:
• In 2000, the Maryland State Teachers Retirement and Pension Fund was fully funded, largely due to investment gains in a strong market.
• In 2002, the legislature voted to partially offset the cost of a statewide tax cut by changing the funding formula for the pension plan. The state's contribution rates were frozen at FY2000 levels as long as funded status was between 90% and 110%. That's the "corridor". And if the funding status fell below 90%, the state only had to increase its annual contribution by 1/5 of the shortfall each year – allowing the underfunding to continue to accelerate .
In the subsequent eight years, several things have happened:
• 'Corridor funding' decreased the amount that the state government put into the pension plan each year.
• In 2006, the legislature voted to improve the pension plan’s benefits; moving the Maryland plan from one of the worst in the nation to the national average. Participants increased their annual contribution to the plan from 2% to 5% of salary.
• The recession caused a massive drop in both the value of the plan's assets and its annual investment income - as was true for every other investment fund in the nation. Reports indicate that the losses in investment income and value due to the recession account for 85% of the current shortfall.
Just as it was ill-advised for the legislature to approve the “corridor funding” rule in 2002 on the heels of a bull market, it would be ill-advised in 2010 to slash plan benefits on the heels of the most recent bear market.
Chatter about eliminating the current defined benefit is a solution in search of a problem. It’s not as if$25,000 is an exorbitant annual retirement benefit. Nor was it benefit levels that caused the current shortfall in the plan; it was the recession.
Add to that the fact that changing from a defined benefit plan to any alternative is more costly for a number of years and one has to wonder why such a change would even be suggested. It is worth noting that two states- Arkansas and West Virginia- are abandoning defined contribution plans after having switched because anticipated savings are unrealized.
Any changes considered in the plan or its funding must reflect the complexity of the circumstances in which we find ourselves. What are the goals of the state pension system? Ultimately, they are to assure a reasonable standard of living upon retirement to the participants in the plan and to help attract and retain the highest quality employees to Maryland and its schools. The teacher pension system does an adequate job at achieving the first goal at present- it is average when compared to the rest of the country. It is certainly little to expect that an average system not be changed in a way that would make it worse. Any changes you may consider recommending need to have the second goal in mind as well.
Simply shifting part of the cost of the Plan from the state to the counties does nothing to address either of these goals. Nor does cost-shifting do anything to address the long term financial sustainability of the Plan, unless one believes that counties need greater ‘fiscal discipline’ to slow the growth in salaries.
If the only question being asked is “how to make the state budget look balanced”, then passing off costs to the counties makes oddly narrow sense, but does nothing to address the long-term sustainability of the Plan. It doesn’t do much for taxpayers either, since it just shifts the tax burden to local governments who will have to take the hard votes to raise taxes in lieu of the state legislature.
At least a decade ago, when the state passed off the cost of teacher social security payments onto local governments, the state granted additional local taxing authority. This time a shift would be even tougher on local governments, since there is no additional increase in taxing authority.
The ramifications of shifting part of the costs of teacher pensions to the counties are multiple, and none are good. Teachers- like all those who work in our public schools, libraries and community colleges - do incredible work with decreasing resources every day. It is the most difficult job that I have ever held and has become more so in the past decade. Over time, teachers will leave Maryland or even leave the profession. Restoring cuts in positions that have occurred around the state would also be made more difficult. There are fewer reading support teachers, for example, who assist our most at risk students. Class sizes will continue to increase.
What about the smaller and the less wealthy counties that will have the least ability to absorb these additional costs? With less ability to generate local tax revenues, will cost-shifting exacerbate the gaps between the haves and the have-nots?
Such an action will also make it more difficult to attract the best employees to Maryland’s public schools, as stagnant wages make a career in public education less attractive.
If the changes to the system being advocated by some also occur, public education, and therefore the students who benefit from this most basic right, would be damaged. The current plan encourages teachers to stay in Maryland and in the profession. Any change to a hybrid or defined contribution plan in an era when increasing attention is being paid to the importance of having an expert teacher in each classroom- indeed , research has shown that this is the most important factor in student achievement - would discourage the best and the brightest from considering our schools as a place to work.
Such a change also places those in the system at risk of outliving their savings and becoming dependent on social services, for which the funding comes from the same source- the state coffers.
Finally, it is also a solution to the wrong problem- we know that the most significant factor in the current underfunded state of the pension system is the dismal performance of the stock market.
We can fix the system to be sure that we achieve its goals without causing harm to the students of Maryland and the professionals who care for, instruct, and challenge them every day. The proposals to move away from ‘corridor funding’ and extend the period of time over which investment losses can be smoothed out are a good start.
Thanks for all of your time, energy, and hard work in helping to arrive at a solution