Tag Archives: pensions

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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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

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.

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 politicalmaryland.com 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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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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