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.
“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 politicalmaryland.com posting], the creators of the corridor [funding method] thought it would be a floor [for state pension contributions], not a ceiling.”
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