In 2011, Maryland's state government was facing significant budget challenges in both the short term and the long term. The lingering effects of the recession and the waning of federal stimulus funds had blown a hole of about $1.6 billion in the state's general fund budget for the next year. And the stock market crash coupled with a history of under-investment had caused a precipitous drop in the levels of funding for the state's employee pension systems, meaning big liabilities for the state in the decades ahead.
Gov. Martin O'Malley took the politically unpopular but necessary step of addressing both. Although it led to massive protests outside the State House from public worker unions — generally some of his strongest supporters — the governor proposed requiring higher worker contributions into the pension plan and lower benefits for workers after they retired. Mr. O'Malley proposed to use $120 million of the resulting savings to shore up the fiscal 2012 and fiscal 2013 budgets but to eventually reinvest all of it — up to $300 million a year — into the pension fund so that it would more quickly achieve full funding.
This year, though, he's proposing to backtrack on that plan and to permanently siphon off $100 million of the savings every year for general budget relief. The General Assembly should reject the idea. It's a breach of trust with state workers, and it could have long-term ill effects on the state's creditworthiness.
The pension reforms of 2011 increased teachers' and general state workers' contributions to their pension funds from 5 percent of their salaries to 7 percent. The reforms also lowered the caps on cost of living increases for future retirees, meaning they would eventually receive reduced benefits. Union members weren't happy at the time, but looking back three years later and knowing what happened to municipal pensions in Detroit thanks to that city's leaders' unwillingness to make such difficult decisions, the deal may not look so bad. As long as it stays a deal, that is.
Governor O'Malley says the reduced investments won't significantly delay the point at which the system is projected to be 80 percent funded, and analysis from the Department of Legislative Services backs him up. Under the original plan, the fund would have hit the 80 percent mark in 2024, and under this proposal, it would reach it in 2025. Under either scenario, 100 percent funding is expected in 2039. But if the savings from pension reform aren't being reinvested into the pension fund, that means state employees are effectively paying a special tax to keep state government running, and that's not right.
But if that doesn't move lawmakers, Treasurer Nancy K. Kopp's dollars-and-cents argument should. She testified before a House Appropriations subcommittee last week in opposition to the governor's plan for fear that it would jeopardize Maryland's AAA bond rating. "This is a difficult thing to defend" to the bond rating agencies, she said. "Not necessarily because of the difference of $100 million but because we set out the plan, we were going to stick to that plan. ... It's a question of trust, in all candor."
Maryland is one of only a handful of states that has a AAA rating from all three major credit rating agencies, and that distinction means we pay lower interest rates on state debt. Would we really lose that distinction if the legislature approves Mr. O'Malley's plan? We'd rather not find out, but there is reason for worry. In their most recent ratings letters about Maryland, all three agencies expressed concern about the low levels of funding for Maryland's pension system, and all three cited the 2011 reforms as an important factor in their decisions to maintain the AAA rating. Standard & Poor's said the under-funded pensions represent "downside risk to the rating." Moody's explicitly listed "failure to adhere to plans to address low pension funded ratios" as something that could make its rating go down.
Mr. O'Malley's move helps eliminate Maryalnd's long-term gap between projected revenues and expenditures, which is also a concern of the ratings agencies. But thanks to the governor's earlier actions, the so-called "structural deficit" is at this point expected to be a relatively manageable problem whether this pension shift happens or not.
Ms. Kopp is no rabble-rouser, nor is she in any way a foe to Mr. O'Malley. She has generally supported his initiatives (even, occasionally, when we thought it unwise). If she is speaking up about this, the legislature should pay attention.
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