Category Archives: Pensions

Avoiding MD’s Pension Reality

By Barry Rascovar

Feb. 14, 2017 – Let’s be honest: No one wants to face up to Maryland’s giant $19 billion long-term shortfall in its retirement program for state workers and teachers. Not the Republican governor nor the Democratic legislature.

True to his Lone Ranger approach, Gov. Larry Hogan is calling for a dramatic change – an optional 401(k)-style retirement program for new state employees.

It sounds good but falls apart when examined close up.Avoiding MD's Pension Reality

The best that can be said about this plan is that it saves both the state and new workers upfront money. Unfortunately, it could leave tens of thousands of state workers far worse off in their retirement years.

Hogan didn’t bother consulting with legislative leaders, pension agency officials or the employee unions to get their input and cooperation. Thus, the governor’s plan has zero chance of passing.

But it goes over well on TV and radio. It allows Hogan to brag that he tried to fix Maryland’s pension problem – though he really didn’t.

Flawed Retirement Approach

Hogan’s plan would weaken the current retirement program by encouraging new workers to leave the system and instead sign up for his 401(k) savings plan. This could mean the loss of a huge sum of regular contributions to the existing pension system. The retirement system’s shortfall would grow, not shrink.

As for workers opting for this “defined contribution” program, 5 percent of their paychecks would go into their IRA account, matched equally by the state. (State workers today contribute 7 percent of their salaries into the pension fund.)

Workers then could invest all that retirement money into the stock market or other financial instruments.

That’s where the risk soars.

In bad economic times, state workers could lose much of their retirement nest egg if they’re not careful. Worse, they’d no longer be eligible to receive a regular state pension. They could find themselves leading a hard-scrabble life in retirement.

The notion of providing state workers with optional ways of saving for their “golden years” makes sense. But not if it means entirely eliminating that pension check.

Existing 401(k) Option

There’s no reason to embrace Hogan’s plan because the state already offers supplemental retirement programs that do much the same thing: a 401(k) investment option and tax-deferred annuity and investment plans. Workers can defer up to $18,000 in salary annually.

The only catch is that the state does not offer a matching payment, as nearly all private-sector businesses with 401(k) plans do. A healthy state match could go a long way toward encouraging workers to save a lot more for retirement.

Perhaps the best way to go is a hybrid system combining a smaller, defined pension benefit with a 401(k) savings component that includes a generous state match. That would put most state retirees in a much stronger position after they leave work. It also could ease the state’s retirement-fund shortfall over the long run.

The catch: It would cost Hogan & Co. a lot more money each year to get such a program started, money the governor doesn’t have in these uncertain economic times.

Besides, Hogan isn’t about to pour more money into worker pensions if he can avoid it.  In fact in his new budget he eliminated a mandated $50 million supplemental contribution to the retirement program created to help bring down the shortfall.

That move deepens Maryland’s pension predicament.

There’s no incentive for Democratic lawmakers to support Hogan’s poorly thought-through bill, either. They’d just as soon let the pension problems slide, hoping against hope for a return of strong economic growth, which could mean high investment returns for the retirement agency.

Thus, the governor’s bill will get a polite hearing – followed by a dignified burial.

Then Hogan can denounce Democrats for failing to “save” the state retirement program. He’ll score political points while kicking the true pension-funding dilemma into the future.

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Trump & Hogan Agree: Corporate Welfare Works

By Barry Rascovar

Dec. 5, 2016 – Maryland Gov. Larry Hogan, Jr. may not have supported or voted for President-elect Donald Trump but they agree on one thing: Corporate welfare works.

Throwing money and tax breaks at Northrop Grumman, Marriott International and United Technologies did the trick this past week – along with a good deal of loud, Trumpian threats in the case of UT’s subsidiary, Carrier Corp., in Indiana.

Trump, Hogan Agree

President-elect Trump celebrating deal to keep Carrier manufacturing plant open in Indiana.

To prevent Carrier from moving 1,400 jobs to Mexico, Trump used heavy-handed insinuation of future punishment to deliver a largely symbolic message that he’ll stop at nothing to save American manufacturing jobs.

Hogan’s task was somewhat different and involved persuasion rather than threats – backed by wads of cash.

A $57.5 million five-year package of “loans” and tax credits eventually persuaded Northrop Grumman to keep its 10,280 employees in Maryland – including the 6,800 who work at the massive former Westinghouse electronics complex near BWI Airport in Linthicum.

Meanwhile, a state-county incentive package of some $60 million was needed to keep Marriott’s headquarters in Montgomery County instead of shifting to Northern Virginia.

The bonus here is that Marriott intends to erect a $600 million complex in downtown Bethesda for its 3,500 HQ employees. That number should expand due to Marriott’s recent $13 billion acquisition of Starwood International.

Democratic Roadblock

The two Maryland deals have been in limbo for months due to high-risk brinkmanship by legislative leaders. The idea was to squeeze money out of Republican Hogan for other purposes dear to the hearts of Democrats in exchange for approval of the Northrop Grumman package.Trump, Hogan Agree

That gambit, which was poorly conceived from the get-go, fell apart when the state’s tax collections underperformed, leaving a gaping hole in Hogan’s budget.

Hogan had always balked at legislators’ extortion effort to hold the Northrop Grumman package hostage until local school funds and other goodies were released.

Lawmakers didn’t seemed to care that reneging on the business deal would have sent a terrible message about Maryland’s business climate to corporations thinking about relocating operations.

But the weak revenue figures this fall put an end to this embarrassing folly. There was no money to make the lawmakers’ strong-arm deal work.

Miller-Hogan Find Middle Ground

Hogan, though, still needed to gain the support of legislative leaders not only on the Northrop Grumman economic-development package but also the Marriott headquarters proposal.Trump,Hogan Agree

He and Senate President Thomas V. Mike Miller finally came up with a workable compromise involving $20 million in school pension funds for localities in next year’s budget.

Now it is up to Miller and House Speaker Mike Busch to complete their end of the bargain by winning approval for the two business-assistance packages from a legislative panel they control.

There’s plenty of irony here.

Had a Democrat been in the governor’s office, there’s no question Busch and Miller would have rushed to support these economic-development packages, just as they did under former Gov. Martin O’Malley.

But with a Republican in the governor’s mansion, Busch and Miller suddenly found problems with these deals.

Demands to Stay In-State

Liberal Democrats, in particular, blanch at the thought of giving away millions in business-retention packages, labeling it “corporate welfare.”

It’s become customary for large companies to demand payments from local and state governments if those governments want to prevent these businesses from moving elsewhere. Democrats fear that more companies will use the same tactic to pry millions from the state, money Democrats want spent on social programs.

Rigidly ideological Republican conservatives also rail against giveaways to corporations, complaining about government interference with the free-market system. (Over the weekend, former Alaska Gov. Sarah Palin called the Carrier deal “crony capitalism.”)

The thinking goes that if Carrier wants to move its furnace plant to Mexico or to another state to cut costs, the company should have the freedom to do so. That’s how the free market works, fiscal conservatives say.

Yet Trump intervened to make political hay and win cheers from Carrier workers in Indiana.

At the same time, he did nothing to stop United Technologies from closing another Indiana plant, costing 700 workers their jobs.

Nor did he lift a finger to halt Rexnord from shuttering a factory just a mile away from the Carrier building. The job loss there is 300. Rexnord is moving its manufacturing business to Mexico.

A third company, CTS, is also shutting down an electronics manufacturing facility in Indiana, creating unemployment for 200 more workers.

On top of that Carrier is continuing with plans to downsize its Indiana plant, laying off 600 union workers at the furnace factory. Also, despite Trump’s plea Carrier is moving its fan coil-making business to Monterrey, Mexico.

So while Trump can crow about the one plant he pressured to remain open, saving by his count 1,000 U.S. jobs (the actual jobs preserved: 730), he hasn’t done a thing about the other 1,800 manufacturing jobs being lost in Indiana.

Choosing Winners

The downside of corporate bailouts (Carrier is getting $7 million in tax breaks from Indiana to remain there) is that these small triumphs fail to address the larger problem:  U.S. manufacturing plants increasingly find they are unable to compete against low-cost overseas competitions.

Here’s a hint why moving production abroad is happening: The average salary for a unionized Carrier plant worker in Indiana is $30.90 an hour.

Choosing winners and losers, as Trump did in Indiana, solves little and provides job solace for just a fraction of the manufacturing workforce at risk of losing their source of income. A more comprehensive approach is needed.

Since the beginning of 2015, 1,600 American companies have shifted production overseas. In November alone, the U.S. lost 10,000 manufacturing jobs.

Clearly, Trump has a gargantuan task ahead of him in which a partial victory at Carrier’s Indiana plant doesn’t put a dent in the problem.

At the same time, Hogan is having more success keeping large corporations content with their Maryland digs. All it takes is persistent negotiations, expressions of good will and a basketful of state and county tax breaks, job-training grants and forgivable loans.

It’s worked most of the time for both Democratic and Republican governors in Maryland.

Hogan’s job is far easier because he’s only competing against other U.S. states, not Third World, low-wage countries.

Trump has a much more difficult field to plough.

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State Pension Confusion

By Barry Rascovar

August 10, 2015 — For Maryland’s 388,500 state workers and teachers — active and retired —  interpreting the pension news these days is confusing business.Maryland retirement agency logo

Item: Over the past 12 months, the state’s pension fund gained 2.68 percent on its investments.

Is that good or bad?

On June 30, the fund’s market value stood at $45.8 billion, a gain of $400 million over the prior fiscal year. All well and good.

But the state failed to come close to hitting its investment target of 7.65 percent. That’s not so good.

Mystifying, isn’t it?

Manipulating Numbers

Welcome to the fuzzy world of actuarial pension and retirement funding. Depending on the statistics and the way they are manipulated, your retirement accounts may be in fine shape or in the toilet.

Since the media loves bad news, headlines routinely give prominence to the state’s unfunded pension liabilities of nearly $19 billion.

What’s not headlined is the slow progress being made in reducing that actuarial shortfall or the misleading way that number is bandied about.

What needs to be kept in mind is that pension investing has an extended timeframe. That applies to the state retirement fund as well as folks contributing to their IRAs.

As the retirement board’s manual notes, “The investment strategy is long-term, recognizing that the average age of the System’s liabilities is relatively long.” It also notes that taking a long-term view of pension investments “could result in short-term instability.”

Ups and Downs

Over the past five years, the state’s investment returns have been darned good, raising the market value of its holdings from nearly $32 billion to nearly $46 billion. That’s an annual average rise of 9.4 percent.

Let the good times roll!

Yet good times don’t last forever. And they didn’t in the last fiscal year, with stock markets delivering an uneven performance. That downer has persisted into this year, too.

The moral is not to get caught up in year-to-year market reports and investment reports. As long as returns are heading upward by a decent amount over the decades, things will come out all right in the end.

What worries critics of the state retirement fund is that the program falls far short of being fully funded. That actuarial ratio stood at roughly 69 percent last year (or 72 percent if you look at the fund’s market value).

Ample Reserves, Ample Time

Here’s the catch: The state doesn’t need to be fully funded today. It has ample reserves to write current pension checks to former teachers and state workers. The rest of its IOUs will come due in the years and decades ahead as the fund’s active members start to retire.

Some will do so soon but the bulk of active teachers and state workers will be at their jobs for one, two or three more decades. The retirement fund has plenty of time to accumulate the dollars needed to write those future checks.

Pension reforms instituted belatedly by the General Assembly in 2011 are now kicking in. This means higher contributions from active members, a less generous pension plan for newer workers and an increase in what state government pays into the pension fund each year.

Past and present legislators, though, often tend to play games with the state’s annual contribution to the retirement accounts. Sometimes they re-write the law so they can adjust the state’s payment by $50 million, $100 million or more to bolster a favored program or balance the budget.

Governors over the decades have been known to play that game, too.

Still, the state’s pension board seems on a path to reach 80 percent of full funding within 10 years and 100 percent of full funding within 25 years — regardless of the ups and downs of the stock market and politicians’ tendency to see the state’s mandatory pension payments as “flexible.”

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Hogan’s Hypocrisy

By Barry Rascovar

May 18, 2015 — Gov. Larry Hogan Jr. makes it sound like he’s riding to the rescue of Maryland’s underfunded pension program that has been continually “raided” by evil Democratic legislators in Annapolis.

Gov. Larry Hogan & Lt. Gov. Boyd Rutherford

Gov. Larry Hogan (left) & Lt. Gov. Boyd Rutherford

What a bunch of hogwash. It’s pure Hogan hypocrisy.

Hogan’s stance — torpedoing a $68 million education appropriation to the state’s most populous jurisdictions and shifting some of that money into the state pension fund — is based on politics, not policy.

Indeed, Hogan is a late convert to the cause of pension-fund integrity.

Silent Secretary

When legislative analysts went before House and Senate budget panels and proposed a 50 percent reduction in Hogan’s $150 million supplemental appropriation to the pension fund, the governor’s budget secretary not only failed to object but congratulated lawmakers for their assiduous work in responsibly paring Hogan’s budget request.

Not until it became politically expedient later in the session to slam Democrats for cutting the supplemental appropriation in half did Hogan belatedly turn into a pension-funding hawk.

Since then, he’s continually referred to Democratic lawmakers’ “raid” of pension money.

Another bit of Hogan flummery.

The pension agency got so offended at this misguided gubernatorial propaganda pitch that it issued a press release regarding “the mistaken impression that the pension fund had been ‘raided’ by the General Assembly during the recently-completed session. This is not the case.”

No Dipping Allowed

The agency explained that the dispute centered on how much extra should be spent to help the state more quickly reach full funding to pay for future pension payouts. The state’s required $1.8 billion budget contribution to the retirement account this year remained untouched.

Indeed, it’s illegal for the legislature or the governor to “dip into” the $45.7 billion pension fund. That money can only be used to make pension payouts. No “raids” are permitted. But you’d never know that from listening to the governor’s spiel.

Hogan’s pension purity pursuit was his way of diverting attention from his other action — denying important state dollars to Baltimore City and other high-cost subdivisions to help them avoid layoffs or cuts in school programs.

He said it would be “absolutely irresponsible” to give that money to the schools instead of pouring it into the pension fund.

He’s got his priorities reversed.

The greatest immediate urgency is bolstering education achievement in distressed communities like West Baltimore. That takes money.

Further fortifying the state’s pension program can be done more gradually over the next decade or two.

Harsh Consequences

Especially in light of civil unrest in poor, racially blighted Baltimore neighborhoods, Hogan’s decision to yank $11.6 million away from the city school system seems short-sighted and counter-productive.

The consequences of his action could be quite harsh when the General Assembly meets next January.  This slap in the face to Baltimore schools won’t be forgotten. Nor will legislators from Prince George’s and Montgomery counties forget Hogan’s slight, either. They lost a combined $37 million in school money.

The governor’s next big decision could be the fate of the two mass-transit lines affecting those three major jurisdictions — the east-west Red Line in Baltimore and the Purple Line in the Washington suburbs.

His actions on the two lines could prove pivotal in his dealings with Democratic lawmakers. Deep-sixing either project will prompt an uproar. Yet Hogan is intent on appeasing his conservative base by finding ways to sharply reduce mass-transit costs.

He’s playing with political dynamite.

If he sets off a Democratic explosion over the fate of the Red and Purple lines, the resulting fallout could cripple Hogan’s efforts to constructively deal with the General Assembly over the next three years.

Judging from his rejection of supplemental education aid, this governor seems determined to restrict Maryland’s future spending habits at all costs. His goal is to lower taxes. Everything else is secondary.

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Betraying State Workers

By Barry Rascovar

March 23, 2015 — Once again, the House of Delegate took the easy way out of its budget bind — and in the process stuck it to future state workers, teachers and taxpayers.

The Senate is on a glide path that follows that same flawed approach.

Instead of facing up to its fiduciary pension obligations, Annapolis delegates opted to play games, placing at risk the safety of state retirement programs.

Budget balancing

In the process, the delegates are leaving the next generation of taxpayers a monster-sized unpaid pension bill totaling in the billions.

If Maryland loses its prestigious triple-A bond rating, you’ll know who to blame.

Thanks to the intellectually dishonest proposal by the Department of Legislative Services, the delegates found a way to save $75 million this year to pay for K-12 education and a salary increase for state employees — if the governor goes along with those suggestions.

How It Started

Back in 2011, the state agreed to supplement its annual pension contribution by $300 million a year. This was the quid pro quo for forcing state employees and teachers to contribute more out of their own paychecks to the pension program.

But lawmakers reneged on the bargain, eventually cutting their supplemental payments to $150 million a year — or to zero when times got tough.

Now the House wants to reduce the state’s supplemental payment to just $75 million each year — a far cry from the original $300 million commitment. Meanwhile, state employees and teachers get no relief in their enlarged pension payments.

A major part of the rationale for this irresponsible move by lawmakers is the fast-rising value of the retirement agency’s stock portfolio. Last June 30, the state pension program topped $45.4 billion — a rise of $5.2 billion in just one year.

Its investment return for the fiscal year was a strong 14.4 percent. Fund managers have exceeded their target of 7.7% growth in four of the past five years.

Roller Coaster Ride

Sounds wonderful, doesn’t it?

It certainly entranced the legislature’s budget analysts, who cited the stock market rise as a key factor in recommending that the state slash its supplement payments by 75 percent.

But a funny thing is happening on Wall Street.

In the first 75 days of 2015, stocks ran out of gas. The long rally stalled. Prices are about where they were on Jan. 1.

If Wall Street’s prices fail to rise, or even fall, for the rest of this year, Maryland’s pension managers won’t come anywhere near their 7.7 percent growth target.

The retirement agency’s unfunded liabilities could jump substantially — and the heat will be on state legislators and the governor next year to make up the difference.

Inevitable Downturn 

That’s why the legislature’s quest for immediate gratification is so misguided. This is not the time to monkey around with reduced pension contributions.

When the bulls rule Wall Street, Maryland politicians start thinking they can cut back on the state’s pension appropriations. But that ignores the inevitability of the economic roller coaster. Prosperity only lasts so long.

If lawmakers don’t prepare for the lean years they will put Maryland’s pension program — already nearly $20 billion in the hole — in an even worse bind.

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Reneging on a Promise – Again

By Barry Rascovar

March 2, 2015 — The legislature’s fiscal leaders, in a truly bizarre move, are considering reneging — once again — on a commitment to state workers and the public by pulling the plug on supplemental state contributions to Maryland’s severely underfunded pension program.

It would save $71 million this year, $179 million next year and $233 million the third year. But, over a 25-year span this action would cost taxpayers a staggering $2.5 billion.

This suggestion from the legislature’s own analysts didn’t come out of the blue. The Department of Legislative Services was told by Democratic leaders in the legislature to find mounds of money that could be cut from the budget for later redistribution to their priorities — education and health care.

‘Deja Vu’

The result is an incredible prostitution of DLS’ fiscal stewardship. It is as though these analysts and legislative leaders learned nothing from the pension debacle of the past decade.

If approved, this proposal would be, as Yogi Berra once said, “Deja vu all over again.”

Solving a short-term budget problem would seriously threaten the state’s long-term fiscal viability — and its triple-AA bond rating.

Legislators would be gambling that a booming stock market continues over the next decade without let-up. This would easily erase the need for supplemental pension payments by the state to help close a whopping $19 billion unfunded liability.

But what if economic good times fade? What if — as is almost inevitable — the stock market suffers setbacks during that time?

Irresponsible Plan

Unfunded liabilities in the state worker and teacher pension accounts would soar, just as they did during the recent Great Recession.

It is a foolish and fiscally irresponsible proposal that never should have been presented to the legislature. It could make a bad situation worse and set off alarm bells at bond-rating agencies.

Interestingly, the Hogan administration considered this proposal and rejected it — even though it would have helped close a $1 billion budget gap.

Budget Secretary David Brinkley

Budget Secretary David Brinkley

David Brinkley, Hogan’s budget chief, said the decision was made to honor the state’s commitment to its employees.

In 2011, lawmakers approved reforms that raised employee payments to the pension system, reduced benefits for new workers and committed the state to increasing its annual payments.

Reneging on that agreement would be a terribly crass and unwise step, a slap in the face to state workers and public school teachers. They still must ante up additional paycheck dollars to fortify the pension system.

Moral Obligation

Why should state legislators walk away from their end of the bargain?

“What duty do we have to employees,” said Del. Tony McConkey of Anne Arundel County. “What moral obligation do we have”?

Del. Tony McConkey

Del. Tony McConkey

“A promise made is a promise kept,” noted Del. Mike McKay of Allegheny County.

Indeed.

Short-sighted illogic got Maryland into deep trouble the first time. Will lawmakers be foolish enough to go down that road again?

Glendening Started It

Back in the early 2000s, Gov. Parris Glendening intentionally underfunded state payments to the pension program so he could increase education aid. The legislature not only went along but came up with a flawed accounting gimmick to justify lower payments.

Known as the “corridor funding method,” this scam lets the state cut its pension allocations when times are good and stock market returns are strong.

But when the recession hit in the late-2000s that corridor became a dead end. The state’s pension liabilities skyrocketed. Tough, painful reforms had to be instituted.

Eventually, the state pension board agreed to phase out the corridor funding method that had caused all the trouble.

Walking Away

Now, DLS is proposing that Maryland repeat its actions of the early 2000s, but without calling it “corridor funding.” The state would walk away from its pledge to state workers and teachers and stop its supplemental payments.

Sure, there would be short-term benefits, enabling legislators to allocate more money for other priorities. Over the next 11 years, the state would save $2 billion that could be spread around to worthy programs.

But here’s the catch: In the subsequent 14 years, the state would have to shell out a staggering $4.5 billion in extra payments to make the pension fund whole.

Even worse, that calculation doesn’t consider what happens to the pension fund in the next two or three recessions. After all, economic downturns are inevitable and an integral part of the economic cycle.

Nightmare on State Circle

What a nightmare this could turn into.

As Brinkley told the House Appropriations Committee on Friday, if the pension fund’s earnings performance turns south over the next 10 years, “this will be a disastrous decision.”

The legislature’s fiscal leaders, especially Del. Maggie McIntosh of Baltimore and Sen. Ed Kasemeyer of Howard County, need to think hard about the dire consequences that could ensue by taking such a dangerous step.

They should remember what writer-philosopher George Santayana said:

“Those who cannot remember the past are condemned to repeat it.”

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No MD Pension Panic This Year

By Barry Rascovar

August 4, 2014–Good news from the Maryland state retirement agency: investment earnings over the past year ending June 30 rose a strong 14.37 percent.

Maryland retirement agency logo

Don’t get too excited: The agency is still digging out of a deep financial hole caused by the Great Recession, poor decisions by former governors and legislators and poor advice from the agency’s consultant.

The retirement fund’s health, though, is showing solid improvement.

Positive Signs

Since the depths of the Great Recession, the value of its assets have risen over one-third, now topping $45.4 billion — a boost of over $5 billion in the past year alone.

Equally important, reforms to the system have kicked in: Increased employee payments, tighter eligibility rules, contributions from counties for teacher pensions and phasing out the ill-conceived Corridor Funding Methodology that let politicians reduce state payments while ignoring the retirement fund’s deterioration.

Combined, all this has kept the retirement fund on track to return to 80 percent of full funding by 2025 as planned. The corner may have been turned.

Index Fund Debate

Critics, especially conservatives and Republicans, continue to complain about fees paid to money managers — $273.8 million in fiscal year 2013 — rather than dumping all the state’s stock and bond investments into passive, low-fee index funds.

But the state agency recouped its payments to professional financial advisers many times over during the past two years with total gains of nearly 25 percent.

Moreover, fund managers already have shifted more of their assets into index funds: 63 percent of domestic equity investments are in these passive accounts; 47 percent of international equities are held in index funds, too.

Recent strong returns could well persist in upcoming annual reports as the nation’s economy finally starts to gain steam and enters a robust growth phase. It’s a good time to be a pension fund manager.

Two-Way Economic Cycle

But there will be dips and plunges along the way. There always are. Economic cycles flow in two directions — up some years, down in others.

To prepare for the down years and slower long-term growth, the state’s pension fund managers continue to re-channel investments into safer, less volatile financial instruments. The goal is long-term, stable growth, not flashy, short-term gains (or losses).

Some states get a bigger annual investment return than Maryland by placing riskier bets. But they are using retirement fund money for these gambles, which in some cases have backfired quite badly.

Long-Term Results Count

Still, we shouldn’t place too much importance in these annual profit-or-loss statements from government pension funds.

Everyone with stock portfolios knows the short-term picture can look terribly bleak (for example, last Thursday’s and Friday’s steep plunge in the Dow-Jones Average). But over the long haul — a decade or more — historic patterns are quite positive.

That’s what counts — the long-range results for pension funds. Harsh critiques of a fund’s 12-month performance can be misleading.

False Assumptions

Placing too much emphasis on the unfunded actuarial liability also can lead to false conclusions.

Yes, Maryland’s unfunded IOUs topped $19 billion as of last year. But there’s plenty of money in the retirement plan to write pension checks to 132,000 retirees and beneficiaries for years and decades to come.

Meanwhile, reforms taken over the past three years will continue narrowing the gap between what goes into the fund and what is drawn out to pay pensioners each year.

Eliminating the Deficit

The saving grace is that Maryland only pays out a fraction of the pension fund’s assets each year. Most of the 192,000 active participants in the program won’t start collecting retirement checks for another 20 or 30 years.

There’s plenty of time to gradually eliminate the unfunded liability.

That’s the stated objective of the retirement agency’s trustees.

They’ve made substantial progress in the last few years. If the nation’s economy continues on an upward trend, the agency’s financial picture could brighten faster than expected.

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Barry Rascovar’s blog is www.politcalmaryland.com. He can be reached via brascovar@hotmail.com

O’Malley’s Latest Pension Grab

By Barry Rascovar

Feb. 10, 2014 — IT TAKES quite a bit for the quiet, diplomatic State Treasurer, Nancy Kopp, to criticize her fellow Democrat, Gov. Martin O’Malley. But she gently laid it on the line in opposing O’Malley’s $100 million budget cut for state pension contributions.

“It’s a question of trust,” Kopp said.

Bond rating agencies will look askance at O’Malley’s effort to permanently reduce by $100 million a year the state’s commitment to funding future pensions. “It will be very difficult to defend” when the agencies question her, she told legislators.

Treasurer Nancy Kopp

“It’s a question of trust”, says Maryland State Treasurer Nancy Kopp

What Kopp didn’t say, but others are filling in the blanks, is that O’Malley’s action is a cold, calculated slap in the face of state workers.

He is reneging on an agreement he made with them just a few years ago.

The irony is that the very same “working families” O’Malley defends so passionately are the ones hurt most by his callous action.

O’Malley Walks Away

Working-class state employees and teachers were asked in 2011 to pay more into the pension fund and accept lower future benefits. Now they are watching the governor walk away from his part of the deal.

That will “be dimly viewed” by rating agencies, noted retirement fund executive director Dean Kenderdine. And for good reason.

What he and Kopp don’t know is how close Maryland could come to losing its coveted Triple-A bond rating because of O’Malley’s pension-funding duplicity.

The good news is that the General Assembly’s budget panels aren’t likely to accept the governor’s high-handed action.

When cuts are made, it’s a near certainty lawmakers will see that O’Malley’s pension grab is countermanded and that the next governor will be required to commit an extra $300 million annually to close Maryland’s yawning pension-fund gap.

From the governor’s perspective, taking another $100 million from the state’s allocation to the retirement fund makes sense.

2015 Budget Book

O’Malley’s FY2015 Maryland Budget

The move doesn’t endanger anyone’s immediate retirement benefits. It helps O’Malley avoid cuts in other programs. It shrinks the state’s long-term structural deficit. And it only delays by a year the retirement agency’s target for reaching 80 percent of full funding.

O’Malley also knows that calculating pension and retirement shortfalls is more an accounting shell game than a science.

Does the state really need on hand today 100 percent of the money required to pay off all future retiree benefits  — 192,000 of them — decades from now?

The laws of probability are prohibitive that Maryland, or any other pension fund, will ever have to make a one-time, all-in payout.

Enough to Pay Current IOUs

Maryland’s $40 billion pension fund has more than enough money to write current retirement checks.

A 2011 law set out a gradual plan for raising the state’s retirement accounts to 80 percent of full funding in a decade or so, and to reach 100 percent in two decades.

That was a sensible approach — but not if O’Malley and his gubernatorial successors override that law and continue to use the pension fund as a grab bag whenever there’s a need for an extra $100 million or so elsewhere in state government.

Barry Rascovar’s other commentaries can be viewed at www.politicalmaryland.com

 

 

The MD State Pension Debate Rolls On. . . .

September 24, 2013

SOME ISSUES never lend themselves to permanent solutions. Government-run pension plan projections fall into that category.

I posted a pension column on July 31, which spurred historical recollections from former state Sen. Bobby Neall (August 7), state Treasurer Nancy Kopp  (August 8) and  former Ehrlich budget director Cecelia Januszkiewicz (August 8), followed by Del. Andy Serafini’s plea for a more cautious approach to estimating future rates of return, and state pension director Dean Kenderdine’s explanation of why the state pension trustees opted for a gradually reduced rate, but not by as much as some urged.SRPS_Logo

Now Serafini delivers another essay that lays out more reasons why the state should further lower expectations of investment returns in the years ahead.

Economic Puzzle

His point echoes conservative economists, who see the glass as half-empty rather than half-full. This is an age-old conundrum: Should the Federal Reserve encourage or discourage higher interest rates and if so by how much? Should the Fed reduce its quantitative easing policy or maintain it? What’s the proper projection for pension investment returns?

No one has a crystal ball that is accurate all the time. Only after the fact does someone suddenly claim “genius” status for predicting a bull or a bear market — until the next time.

Del. Andy Serafini

Del. Andy Serafini

Serafini, a financial planner, notes there are political reasons for Maryland maintaining a much higher expected rate of investment return than he would like.

That was made clear when the pension trustees opted to gradually lower the projected rate of return a tad. Len Lazarick, ace reporter/publisher of MarylandReporter.com, covered the pension trustees meeting and noted that when the state’s actuary said it would be wiser to drop the projected rate right away to lower levels, state budget secretary Eloise Foster responded: “I don’t know whether we could afford it right now.”

It would cost hundreds of millions of dollars each year to drastically scale back Maryland’s assumed rate of investment return. That money would have to come out of the general fund budget, forcing major cutbacks in social programs and aid to the counties.

Democratic Gov. Martin O’Malley isn’t about to ruin his reputation for preserving and strengthening social programs just to fortify the pension program’s financial underpinnings . Even Republican Gov. Bob Ehrlich didn’t pursue that course.

Dissatisfied Conservative Voices

Given this fact of life in Annapolis, the pension trustees voted to take a gradual approach in shaving projected investment returns. It doesn’t satisfy Serafini and other conservative voices, as he makes clear in his latest essay:

Dear Mr. Rascovar,

I read with great interest [Dean] Kenderdine’s recent response to my comments. Unfortunately for Mr. Kenderdine [Executive Director of the Maryland State Retirement and Pension System] I have kept him very busy responding to my various letters to the editor or other past commentaries.  I should say that I have tremendous respect for members of the Board of Trustees as well as Mr. Kenderdine.  They have a very difficult job to do.  It is made more difficult having to put up with politicians.

Currently, there is a great debate occurring across our country regarding the proper basis for valuing liabilities in pension plans.  Whether it is the bond rating agencies, Pension Benefit Guaranty Corporation or the American Academy of Actuaries, the opinions vary greatly.  Corporate defined-benefit pension plans are federally required to use an index tied to corporate bond rates, which allows them to use a rate in the 4% to 6% range (with certain exceptions).  Many public pension plans justify their current rates in the range of 7% to 8% based upon past experience.  However, the current assumptions are forward-looking and few believe the next 25 years will prove to be as favorable to investors as the past 25 years.

I particularly found Mr. Kenderdine’s comment that Moody’s “arbitrarily” selected a lower rate in calculating the unfunded liabilities of states such as Maryland to be interesting.  If we are supposed to trust that the AAA rating Maryland receives to be well-earned through the august body of analysts such as Moody’s, why would we expect that they would be arbitrary in choosing such a significant method for determining pension liabilities?  For the record, they use an indexed rate based upon a corporate bond rate that is duration specific and relevant to most plans, including Maryland’s.

To remove all the clouds and esoteric conversations, we need to consider what is really going on here. If we consider what is known as the “prudent man rule,” it may shed a different light. This is a requirement of all fiduciaries that states that any one exercising control over assets for another person (i.e. the pension participants as well as the taxpayers) should exercise the care and prudence acting in the beneficiaries’ sole interest. The problem is that if we use a lower assumed rate like private pensions and the others are suggesting, that would lead to significantly higher annual contributions.

What Mr. Kenderdine did not say is it is politically uncomfortable to lower the expected earning rates because of these significantly higher annual contributions. These increases could be as much as several hundred million dollars or more over the years if we were to lower the rates just by a percent or two. Compounding matters, the annual growth in contributions to these plans is currently restricted by Maryland law, which precludes contributing an amount recommended by the actuaries.  Such a practice would be illegal in private sector pension plans. While it may create significant budget strains, I believe as fiduciaries the lower rates tied to an index is acting in the best interest of the plans. Keep in mind that if there are shortages the taxpayers and participants ultimately bear the risk. Just ask the people in Detroit.

They will argue that public plans can use higher rates due to the past performance and that, unlike corporations, they do not risk going away. In my previous letter I explained why future results will struggle to match the past 30 years. Warren Buffet has also said that anyone expecting over 7% is foolish.

Rick Dreyfuss a senior fellow with the Manhattan Institute and pension expert argues there is another problem with the current funding methodology.  Most of the current employees that have significant accrued pensions will retire in the next 15 years. We are planning to pay off the unfunded liabilities for these individuals over 25 years. This would be like buying a car that you plan to own for five years and taking out a ten-year loan. This means that we will be paying for the liability well after the people retire. Not a prudent approach in my opinion.   Moreover, such a demographically driven accounting policy for pensions was recently revised and adopted by the GASB as their formal accounting standard. Bond rating agencies such as Moody’s also analyze credit risk with such a concept in mind.  Both entities also favor the use of the market value of assets to determine annual pension cost versus the rolling average approach used by most public sector plans including Maryland’s.  The use of the market value of assets is also a federal requirement of private sector defined benefit plans. This approach, while arguably creating somewhat more volatile results, better ensures costs are properly recognized rather than deferred to future generations.

The bottom line is, as I said in my earlier correspondence, a more cautious rate is more prudent to properly fund the pension plan. If the performance is better that would mean future contributions could be reduced once the funded status reached appropriate levels of 80% or more. Using higher expected interest levels reduces the mandatory contributions and passes the risk not only to pension participants but to the taxpayer who is the ultimate backstop. As a public official, taxpayer, and financial adviser I cannot support that type of approach.

Andy Serafini

MD State Pension System — An Insider Perspective

Getting all the facts straight in the Maryland’s pension fund arena continues to be a work in progress.

Dean Kenderdine, executive director of MRPS, sent along this comment to clarify remarks published here by Hagerstown Del. Andy Serafini about the pension fund’s move to shrink it’s projected rate of return on future investments.SRPS_Logo

Here’s what Kenderdine wrote:

“Mr. Rascovar:

“I have read with interest your writings on the Maryland Retirement and Pension System, as well as the responses it has elicited from state officials, past and present, who have been directly involved with the public policy behind the system.  The recent post from Delegate Andrew Serafini prompts me to offer one important correction to your readers.

“In discussing the system’s assumed annual rate of return, Delegate Serafini cites recent actions by Moody’s in [its] analysis of states for their credit ratings.  The delegate is correct when he states that the system’s board of trustees recently lowered the system’s assumed rate of return from 7.75% to 7.55%.  This is one of several economic and demographic assumptions that go into determining the annual contribution required of the system’s employers, including the state.  It is the rate used for funding purposes.

“The board took this action after extended and careful deliberation, with the benefit of advice from the system’s investment consultant and actuary who, in addition, gathered detailed input from a number of economists and investment professionals.  Like other public pension plans, the Maryland system, its expert advisors and the board of trustees have taken a long-horizon look to the future in making the investment return assumption.  The system is indeed, a long- term investor whose returns over the past 25 years, inclusive of the recent Great Recession, have been 7.85%.

“Delegate Serafini states that ‘municipal analysts are also saying [Maryland’s] investment assumptions need to be further reduced – lower than what the retirement board recently did from 7.75% to 7.55%.’  It should be made clear that the rating agencies have not expressed the same opinion.  None of the three rating agencies has indicated to Treasurer Nancy K. Kopp, Maryland’s lead in the oversight of state debt, that the state’s assumed rate of return should be lowered.

“Moody’s has recently adopted a new practice where they measure all public pension plans’ liabilities using a common assumed rate of return, which they arbitrarily set at approximately 5.5%.  According to Moody’s, in [its] June 27, 2013 report entitled ‘Adjusted Pension Liability Medians for U.S. States,’  [this has been done] to ‘achieve greater comparability and transparency in our credit analysis…’ of all states.  It is Moody’s effort to achieve comparability in the accounting of pension liabilities.  In its April 17, 2013 report entitled Adjustments to US State and Local Government Reported Pension Data, Moody’s states that “[o]ur adjustments are not intended as a guide, standard or requirement for state or local governments to report or fund their obligations.”  Moody’s goes on to say “We recognize the value of the actuarial approach for governments, who are ultimately concerned with budgetary planning.”

“Moody’s reviewed the status of the State’s pension systems when reviewing the State’s creditworthiness for its last bond sale in July 2013.   Maryland retained its Aaa rating from Moody’s. The Moody’s report is available at http://www.treasurer.state.md.us/media/56252/moodys_2013_2nd.pdf.