Treasurer Nancy K. Kopp and Comptroller Peter Franchot warned senators Wednesday that Gov. Martin O'Malley's proposal to divert $100 million a year from the state pension fund to next year's budget threatens the long-term health of the retirement system.

The two officials — who make up two-thirds of the powerful Board of Public Works — made a rare joint appearance before the Senate budget committee to ask senators to find another way to balance the state budget.

They cautioned that the agencies that rate the state's bonds are already concerned about the condition of the state's pension fund, saying the transfer of $100 million could prompt a reconsideration of the state's AAA bond rating.

"If we lose the AAA bond rating, we will look at this $100 million transfer as the beginning of the end," Franchot said.

The administration is seeking to tap into the $300 million a year the General Assembly set aside in 2011 to shore up the $43 billion pension fund. The system pays retirement benefits for 132,000 retired state workers, police and public school teachers and has 244,000 active members paying in.

As part of a major reform bill supported by O'Malley that year to address chronic underfunding, the General Assembly increased the amounts members paid into the system and trimmed benefits for future employees. The changes were intended to produce $300 million a year toward achieving full funding by 2039 — an amount the administration wants to cut to $200 million.

State Budget Secretary T. Eloise Foster, defending the move before the committee, said the $100 million represents a small amount of the more than $1.9 billion a year the state pays into the system. She said the transfer is needed to close a long-term revenue shortfall.

"We're trying to reach the point where we don't have a structural deficit," she said.

Kopp, chairwoman of the pension system, said that diverting that money would leave the state $1.75 billion short of achieving the goal of full funding by 2039. That would require either extending the time to reach full funding, paying greater amounts into the system in future budgets or cutting benefits — though she ruled out the third option.

"Our concern is that this is the beginning of the unraveling of what was a very hard-won compromise," Kopp said. "It really is a question of the long-term cost."

Kopp and Franchot said they hadn't raised their concerns directly with O'Malley, the third member of the public works board.

Some senators questioned why the administration is proposing to make the diversion permanent rather than seeking a one-time transfer to balance next year's budget. But Franchot said that even a one-year shift of funds could have dire consequences.

"The ratings agencies expect the state to follow through on the commitment" it made, Franchot said.

Some members of the committee expressed skepticism about the warnings.

"This in and of itself isn't the straw breaking any camel's back," said Minority Leader David R. Brinkley of Frederick County.

Sen. Edward J. Kasemeyer, the Howard County Democrat who chairs the committee, noted that the panel has only a week to find alternative cuts before it is scheduled to move the budget to the full Senate.

michael.dresser@baltsun.com

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