During the last session of the Maryland General Assembly, leaders of the state Senate recognized that Maryland's unfunded pension obligations are one of the biggest challenges facing the state when it comes to the issue of maintaining fiscal responsibility. The big drive to solve the problem was to pass part of the liability to local governments (the counties and Baltimore City).
Luckily, the House of Delegates thought that the causes were deeper than perceived. When the compromises resulted in a commission to study pension sustainability, I applauded what appeared to be recognition of the problem and a serious desire to correct it.
Recent presentations to the commission, however, have continued to misdirect what the real problem is. The blame is still placed on local boards of education for raising teacher salaries. And, the suggested solution is still to shift the fiscal burden to county government.
Such suggestions not only fail to address the major issues confronting the pension system (and the taxpayers who help fund it), but they conveniently forget that the state played a major role in increasing payrolls. One of the stated goals of funding the Thornton Commission recommendations was to help local boards attract and retain teachers. While the fiscal note acknowledged its potential effect on payrolls, it did not quantify its impact on pension costs. Those who voted for it should not be allowed to forget that omission.
The state needs to take ownership of the fact that the bulk of the problems in the pension system stem largely from political problems and mismanagement. Having a fully funded pension system is not an unattainable goal. As recently as 2000, it was funded at 101 percent. But its success helped lead it to potential failure.
First, funding to keep the system at a high rate was dropped. Over the succeeding seven years, statewide pension funding was shorted by $947 million. Even more important to this discussion, however, is that the benefits for teachers were enhanced. In fact, the state's own actuarial report from 2008 asserts that these changes had the greatest effect in altering the asset-to-liability ratio.
Since 2006 was an election year, members of both political parties found it impossible to vote against any changes; the bill enhancing benefits passed with no negative votes. It was a costly mistake. A regular family does not go out and buy a bigger, more expensive home just because they believe they can afford the new mortgage. They look at the all the other associated costs: higher utilities, higher taxes, increased maintenance. State leaders forgot that.
The state's decision in 2002 to adopt the "corridor" funding method was also a mistake. The corridor method merely pushes the expense of funding a pension into the out years. It allowed Maryland to develop a pension system without regard to its true costs, much as an interest-only mortgage allowed many Americans to purchase a home without regard to its true, final cost. We have seen what that did to the housing market. Now we are beginning to see what the corridor method is doing to pension systems.
Perhaps the largest driver of the pension problem, however, has been the mismanagement of the fund by the state. It has selected and hired (at roughly $140 million) a group of investment managers who have produced dismal results. In good and bad economic times over the past 10 years, our state's pension fund has trailed its peers by roughly $3 billion. No business person would tolerate that, nor should Maryland.
A recent study has suggested that Maryland would have done better by simply buying index funds and forgoing investment managers altogether. Index funds use smaller staffs and cost their investors less. They have outperformed actively managed funds. But, since Maryland has consistently been in the bottom eight of states (even in good times), that might not be hard to do.
Since none of these problems were the result of actions by county or city officials, the desire of Senate leaders to "pass the buck" to local government is patently unfair. Actually they are not merely "passing" the buck; they are proposing to take it back — to the tune of $337 million.
If the state is serious about fixing its pension problems, its leaders need to take ownership of the problem rather than simply hand it off to someone else. Acknowledge the causes and fix them, or we will be back here again with both the teachers and the taxpayers stuck in the middle.
David R. Craig, a retired educator, is the Harford County executive and president of the Maryland Association of Counties. This article is adapted from testimony he provided this week before the Public Employees' and Retirees' Benefit Sustainability Commission in Annapolis. His e-mail is countyexecutive@harfordcountymd.gov.