Category Archives: Pensions

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

MD Pension Fund — Another View

August 15, 2013

AND NOW FOR a more global perspective on paying for pension fund obligations, here is Del. Andy Serafini of Hagerstown, who emailed me with his own, thoughtful analysis, which is more downbeat than mine. Except for editing to clarify or to make grammatical changes, the thoughts are the Republican delegate’s:

“I read with interest some of the recent posts and comments on the Maryland Pension Plan. I know that politicians have trouble with feeling that we are the subject of every comment but your statement about ‘conservatives warning of doom and gloom,’ or something along those lines got my attention.

“I have attached several pieces of information for your review that might paint a different picture. Certainly, the piece from The Economist, which would never be confused for a conservative publication, speaks volumes. That we make the top for [poorly] funded status is not encouraging.

Del. Andrew Serafini of Hagerstown

Delegate Andrew Serafini

“I have included articles from  CNBC, Washington Times and Wall Street Journal  for your consideration. If you will note specifically it is Moody’s that has stated that the [state’s unfunded pension liability] is much higher and municipal analysts are also saying [Maryland’s] investment assumptions need to be further reduced — lower than what the retirement board recently did [in lowering expectations for investment growth] from 7.75% to 7.55%. Illinois is facing a lawsuit over inflated assumptions on its pension performance.

“Since the 1740s, interest rates have been on a 30-year cycle. The last time they were this low was 1952. They then reached a peak at the end of the Carter administration and beginning of the Reagan administration in 1982. Since that time they have been on a steady decline, until recently.

“Moving from high to low [interest] rates created very high bond investment returns that will not be replicated in a rising [interest] rate environment. As far as the [national]  economy, the Gross Domestic Product numbers were recently revised downward, and with China and other economies slowing, you are correct that the [U.S.] economy may [experience] slow growth in the coming years.

“Washington still has issues that must be addressed (see Milton Ezrati attachment).

“Is it possible that we will see the economy improve and hopefully investment returns for the Maryland State Retirement Agency as well? One would hope.

“The reality is that even with all of the changes [Maryland made in recent years to pension fund] contributions and formulas and getting rid of the corridor [funding method], annual contributions will grow by $500 million in the next few years. [Combine that] with the extra $500 million to service the state’s general-obligation bond debt due to lower real estate values (Maryland led the country in foreclosures [in the spring of 2012]) and, as [Department of Legislative Services chief] Warren Descheneaux says, the concern that the federal government may not pay all of [its Obamacare obligations for] increased medical expenses in Maryland.

“Where will the extra $1 billion to $1.5 billion come from in the next few years [to meet pension and other obligations]? Once again that Wall Street Journal article on how revenues spiked last year due to tax planning has been confirmed by the Comptroller’s Office.

“As a financial planner, I try to look at a realistic expectation and then the “what if” scenarios. This is not pessimistic but realistic. Not planning for possibilities can be devastating. As Bobby Neall stated [in a previous posting], the creators of the corridor [funding method] thought it would be a floor [for state pension contributions], not a ceiling.”

God bless,

Andrew Serafini

Delegate 2A

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