Tag Archives: Glendening

MD Pension Fund Mystery Unearthed ! !

August 14, 2013

ONWARD WITH historical clarifications — and a new puzzle connected to Maryland’s pension fund mess and how the state stepped in such deep doo-doo.

First, in response to former state Sen. Bobby Neall’s corrective comments on the true birth-fathers of the now-discredited “corridor funding method,” for state pensions, Maryland State Treasurer Nancy Kopp has chimed in.

She emailed her staff and the pension board that Neall’s version as recounted in www.politicalmaryland.com  is “a very fair and accurate description of the origins” of this unorthodox approach that is now being phased out over 10 years.

SRPS_LogoKopp diplomatically describes it as “the legislature’s prudent attempt to constrain [Gov. Parris Glendening’s intentional] underfunding” of the retirement system. (In truth, it was a raid on the pension fund.) She also notes “the Board of Trustees opposed it from the beginning.”

Kopp explains that “regardless of the legislators’ intention, the corridor-based funding level was always subsequently treated in the budget as the required amount, rather than as a floor.” That short-sighted move helped Glendening pay for new social programs and enhance his reputation, but it created massive pension funding gaps that will take a decade to eliminate.

Neall’s “strong voice and incisive leadership” on pension matters might have prevented this terrible misjudgment, Kopp writes, but by then he had left the state Senate. He was “sorely missed” — an understatement if ever there was one.

And Now. . . . The Mystery

Skip forward a few years and the second pension blunder takes place.

Republican Gov. Bob Ehrlich is facing a Hobson’s choice — sign an expensive pension enhancement bill sponsored by the state teachers union (passed unanimously by both houses) — or risk antagonizing that influential union when he runs for reelection in the fall.

Cecilia Januszkiewicz, the governor’s capable budget secretary in 2006, sent me this email in an attempt to elucidate:

“Saw your pension article. Just for the record, the 2006 pension enhancement was introduced by Mary Dulany James in her capacity as Chairman of the Joint Committee on Pensions. It was not an Ehrlich Administration initiative. It passed both [h]ouses unanimously. It became law without the Governor’s signature. You can look it up.”

Sure enough, the ever-alert Department of Legislative Services reports that the governor did not sign the pension bill Januszkiewicz refers to. Yet all news organizations (The Sun, the Post, the Daily Record, the Gazette, Associated Press) report that Ehrlich signed the pension enrichment bill that day.

Even more baffling, Ehrlich, Lt. Gov. Michael Steele and the governor’s press office went to great lengths to praise his signing of the enrichment bill.

What’s going on?

. . . . The Rest of the Story

Here’s the way it happened: The pension enhancement bill, not sponsored by the administration, passed unanimously in both chambers, as Januszkiewicz wrote.

But so did a second pension bill — this one made minor changes to pension practices, simplified language and corrected grammatical errors. The bill had “no fiscal effect.”

It is the second, revenue-neutral pension bill, HB1430, that Ehrlich refused to sign or veto. Why remains shrouded in the mist of time.

The Republican governor did, though, sign HB1737, the expensive pension enhancement bill (total price tag to the state and counties: $2.1 billion). He vetoed the Senate version because it was duplicative.

End of this mini-mystery. It was a mix-up anyone could make. Case closed. Unless, of course, readers of this blog unearth some new pension twist buried deep in the recesses of Maryland’s state archives.

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puzzle in this pension

View From the Pension Fund Ground Floor — Bobby Neall

August 7, 2013

THERE’S ALWAYS ROOM for clarification in this blog, especially when the clarifier was there at the Creation.

Below is an email I received from Bobby Neall, the former Anne Arundel County Executive, state Senator and state Delegate who knows more about fiscal and pension finances than just about anyone in Maryland. Here is his valiant effort (with stylistic editing on my part) to get the facts straight in my July 31 post on the history of Maryland’s pension problems:

“Am enjoying your columns immensely. Your most recent one on the pension system conflicts somewhat with my recollection, however.

“Warren Deschenaux [Director of the MD Department of Legislative Services] and I [then a state Senator] devised the so-called corridor methodology [for funding the state’s annual pension appropriation] as a means to prevent then Governor Glendening from diverting required pension contributions to discretionary spending.

” At the time [Glendening] was using the annual funded status of the systems — a mere snapshot — as the determining factor as to how much the [state’s] annual contribution should be.

“The rationale for the corridor [funding method] was as long as the funded status was between 90-110 percent, an amount equivalent to the [state’s] previous year’s contribution was sufficient.

“Given the legislature’s anemic budgetary powers, this was all we could do to prevent the governor from skipping payments altogether.

” So, while our solution was not without flaws, it prevented the hijacking of money properly intended for the pension system.

” It was meant to be a FLOOR.

“Somehow during the Ehrlich term, it became a CEILING, no doubt because of the tightness of money [in the governor’s budget].

“The situation, as I recall it, was made worse by [the decision of the governor and legislature to improve] pension benefits without [the state] making ample provisions for higher commitments to the system.

“So in summary, the choice we faced was either mandate a specific contribution or risk a Prince George’s County-style pension finance scheme [i.e., contribution holidays].

“Clearly, in the second Glendening term our action was warranted and necessary.”

 Bob Neall  

[A further aside: Today, Neall is President of Priority Partners, the state’s largest Medicaid managed-care organization with over 225,000 members. My thanks to him for placing this matter in its proper context. An earlier editing change in the column for accuracy’s sake is due to the diligence of Major Morris Krome, a longtime trustee of the MD state retirement system.] 

MD State Pension Fund Revives

BY BARRY RASCOVAR / July 31, 2013

A funny thing happened to the Maryland state pension fund on the way to fiscal perdition: It recovered lost ground, reformed itself and came up with a 10-year plan to put its retirement programs on solid, long-term footing.

The pension fund topped $40 billion in assets this summer, regaining all its losses (plus $800 million) since the Great Recession swoon that saw a 20 percent drop in just one year. Since the recession’s trough in 2009, the state fund has added a whopping $11.75 billion in earnings, an average of 10 percent a year.

SRPS_LogoThat won’t please the naysayers and conservatives who have been predicting doom and gloom for the retirement program. Thanks to changes that require more local government and employee contributions, lower annual cost-of-living adjustments and longer years of service to qualify for benefits, the future is beginning to look brighter for Maryland’s fund.

A slowly recovering national economy — and stock market — certainly helped.

In bad times like the Great Recession it is easy to forget that the economic cycle, similar to a roller coaster, eventually ends its gut-wrenching plunge and starts climbing upward once again. Signs now point to a lengthy period of slow growth, which could give the Maryland pension fund a string of good-news stories in the years ahead.

Blame It On Glendening And Ehrlich

Not that everything is rosy. Some wretchedly poor decisions in the early part of this century guaranteed deep pension trouble. The worst move came from former Gov. Parris Glendening, who sacrificed the retirement fund’s future so he could spend more during his final years in office.

When Glendening intentionally underfunded the retirement system, the General Assembly — over the vigorous objections of the pension board and Comptroller William Donald Schaefer — adopted a fatally flawed methodology to shrink required state contributions and thus sanction Glendening’s action. Politics triumphed over sound actuarial policy.

This dubious plan, the “corridor funding method,” worked fine when Wall Street was hitting new highs and the pension fund earned double-digit profits. But the scheme collapsed like a house of cards when the stock market’s “technology bubble” burst and then the Great Recession hit. Each year, it seemed, the pension fund was digging a bigger financial hole.

This was compounded by a terrible political decision from former Gov. Bob Ehrlich to curry favor with state teachers by giving them extra pension benefits. He figured that with a few good years of stock market investments the pension board could afford these political goodies that might help him get reelected.

Neither happened. Teachers didn’t support the governor in 2006 and the more generous pensions dragged the retirement programs deeper into a giant pit of unfunded pension obligations.

At Last, Pension Reforms

That precipitated much-needed legislative reforms, which add more local and employee contributions to the system while slowing the growth in the fund’s annual payouts. Then finally this past legislative session, the General Assembly agreed to phase-out the ill-conceived (and illegitimate) corridor funding method

Combined with surging stock prices, what had been a bleak outlook today is a whole lot brighter.

Of course, debates over the viability of pension funds can distort reality if the funds are held to impossible standards. Those bemoaning the condition of Maryland’s state pension program make it sound as if it’s about to go broke. They want the retirement programs 100 percent fully funded.

While that’s not impossible — Maryland’s pensions were at 106 percent of full funding before Glendening messed things up — insistence on such a high standard can mislead the public.

Even in its lean years, the state’s retirement programs remained in good shape. It’s annual earnings and contributions from 244,000 teachers and state workers (and now local governments) are usually enough to come close to offsetting annual payouts to 132,000 retirees. it all depends on the fund manager’s investment success.

For the pension fund to go broke, it would take decades of poor investment results. History tells us that’s quite unlikely.

In the past quarter-century, even with recessions and bursting financial bubbles, the Maryland state pension fund’s annual  investment return averages around eight percent — in line with historic Wall Street rates.

And while the state spends too much on Wall Street professionals to guide its investments (a whopping $225 million last year), these advisers do earn their pay. The actively managed portion of the state’s portfolio added $800 million more than it would have in passively managed index funds favored by conservatives — even after deducting for the hefty consultant fees.

Taking Out A Mortgage

Ten years from today, Maryland’s pension plans should be nearing 100 percent funding. When that happens, trustees are committed to amortizing the state’s future retirement obligations — taking out a long-term loan similar to a 30-year, fixed-rate mortgage. That would take much of the uncertainty and volatility out of the equation.

Trustees also have agreed to lessen the pension fund’s reliance on the unpredictable stock market. Investments are gradually being shifted to private equity placements, which aren’t affected by the emotions and manipulations of Wall Street, and to other alternative investments that are safer and more diversified income producers.

Of course, the next governor could wreck this carefully constructed approach by promising big retirement raises to state workers and teachers in the gubernatorial campaign. Unexpected market upheavals could mean large equity losses for the fund’s managers, too.

Then again, maybe state leaders have learned some painful lessons. Pension giveaways have long-term, negative consequences. Investing too much of the pension fund’s capital in the stock market is a high-risk step that’s not worth taking.

The state retirement board, led by Treasurer Nancy Kopp, seems rejuvenated and headed in the right direction. It rode out the roughest storm in the retirement system’s history and came away the better for it.

(NOTE: This is a revised version that corrects the historical record on how the corridor funding method was adopted a decade ago.)

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