The agreement today between House and Senate negotiators over changes to Maryland state worker pension and retiree health benefits is probably the most significant step the governor and legislature have taken this year to shore up the state's long-term fiscal health. Maryland's pension system is underfunded by $19 billion, and retiree health care benefits by $16 billion. The annual costs to the state to maintain those benefits are skyrocketing, and proposing reforms was the most important — and politically risky — thing Gov. Martin O'Malley did this year.
In the end, there were five major sticking points in the negotiations, which caused talks to break down on Friday. But when lawmakers returned to Annapolis this morning, they quickly came to an agreement that wisely split the difference between the two sides. Here's what they did:
•Retirement benefits for new employees. The easiest of the five disagreements to resolve was the one dealing with pension benefits for newly hired state workers. The House and Senate were in agreement on this one, and it was only the last-minute effort of the Maryland State Education Association, with some backing by the governor, that made it an issue. Mr. O'Malley's initial proposal called for existing state employees to choose between a higher contribution to their pension system or a lower "multiplier" for their benefits. As it stands, employees get 1.8 percent of their average final salary for every year of service and contribute 5 percent of their salary to the fund. The governor's proposal called for existing employees to choose between increasing their contributions to 7 percent or accepting a multiplier of 1.5 percent. The House and the Senate eliminated the choice and made it a 1.8 percent multiplier and a 7 percent contribution.
The final dispute was over new employees. Mr. O'Malley initially wanted them to have a 1.5 percent multiplier and a 7 percent contribution. Both the House and Senate agreed to it. But the teachers union protested, saying that would set up a second class of employees, and the governor asked the legislature to reopen the matter. They wisely left it alone. There is ample precedent for employees hired at different times to have different benefit levels, and over time the change the teachers want would amount to hundreds of millions in extra costs per year.
•Prescription drug costs for retirees. The governor, House and Senate all share a goal of moving state retirees into Medicare Part D in 2020. The question was how to get there. The Senate proposed a $500 deductible and creating a system of "co-insurance." Instead of co-pays, in which beneficiaries pay a set fee for their prescriptions, no matter how expensive they are, a system of co-insurance has them pay a percentage of the cost of the drugs, up to an annual out-of-pocket maximum. That's how Medicare Part D works, and the Senate had a point that it behooves the state to get retirees used to the system before they are dumped into the federal plan. But House leaders were right that doing so too quickly could be quite a shock. The conference committee adopted the House approach, which includes higher co-pays but not coinsurance. Still, legislators should work to make a gradual transition to coinsurance in the coming years.
•Cost-of-living adjustments. The House wanted to cap cost-of-living adjustments at 3 percent in years when the retirement system makes its investment target of a 7.75 percent return and at 1 percent otherwise. The Senate voted to cap COLAs at 2 percent and provide no adjustment in years when the system fails to meet its target. (Because of previous legislation, workers only get COLAs in years when there has been inflation.)
Both chambers had a point. Under the Senate plan, retirees would have gotten no COLA in six of the last 10 years, and the House was right to leave in place the possibility, though not a guarantee, of increases in times when the returns fall short. At the same time, the Senate was right to avoid large benefit increases during years when the stock market performs well that may not be affordable during periods when the state's investments lose value.
The conference committee wisely opted for a combination of the two — the House's approach in years when returns fall short but a maximum of a 2.5 percent increase in good years.
•Length of service requirements. For new hires, the House and governor proposed requiring 30 years of service regardless of age or 65 years of age with at least 10 years of service. The Senate proposed a "rule of 92," that is, a worker's age plus years of service must add up to at least 92 to receive full benefits, with the exception that people could still retire at 65 with 10 years of service. They settled on a "rule of 90." The concept is important because one of the major drivers in pension and benefit costs was the ability for people to retire relatively young and collect benefits for a long period of time. The rule of 90 begins to address that.
•Judicial pensions. The governor proposed increasing pension contributions for new judges from 6 percent to 8 percent. The House voted to make that apply to new and existing judges. The Senate, responding to a request from the judiciary, wanted to run the matter by the Judicial Compensation Commission first. That's what the conference committee did, and it's reasonable, given that the legislature doesn't make adjustments to judicial salaries without hearing from the commission first. And if the commission suggests reforms the legislature considers insufficient, it can enact the higher contributions a year from now anyway.
The proposed changes are expected to bring the pension system to 80 percent funding by 2023, and in the meantime they will save the state billions of dollars in contributions. State workers surely won't be happy about the reforms, but they help ensure the stability of the system and the sustainability of the state's commitment to its retirees.