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Lawmakers weigh pension shift to free up funds

Lawmakers weigh pension shift to free up funds
Comptroller Peter Franchot, left, and Gov. Larry Hogan, shown in this file photo, both oppose a proposal to cut payments to the state employee pension system. (Brian Witte / Associated Press)

The General Assembly's budget committees are weighing a proposal to cut payments to the state employee pension system, a move that would free up as much as $60 million that Democratic lawmakers would like to redirect to education and other programs.

But Gov. Larry Hogan opposes the proposal. And Comptroller Peter Franchot calls it "a bad, bad, bad idea."

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The proposal comes from the Department of Budget Services, where analysts have been asked to come up with possible cuts to Hogan's $40 billion state budget. House Speaker Michael E. Busch has said he wants to find at least $144 million in cuts that could offset Hogan's cuts to the state's education aid formula.

The state pension system has 382,000 members, including present and retired state employees, public school teachers and law enforcement officers.

The analysts have proposed changing the funding method that determines how much the state pays into the $44 billion pension fund each year.

Since 2011, the state has been phasing out a method known as corridor funding — which seeks to smooth out contribution fluctuations from year to year — and replacing it with the more commonly used actuarial funding.

Corridor funding had left the pension system severely underfunded, prompting Gov. Martin O'Malley to propose a sweeping reform package that set a goal of achieving by 2023 an 80 percent funding level — generally considered adequate for a public pension plan. During the process, the state is scheduled to make supplemental payments of $300 million into the fund.

Warren Deschenaux, the legislature's chief analyst, said years of strong investment returns have put the state on a path to reach the 80 percent goal by 2021. His department is proposing to scrap the supplemental payments and shift to actuarial funding in next year's budget plan.

The effect of that change would be to reduce the state's payments into the system next year and over the next several years. Deschenaux said the state could do so and still hit its original funding target date of 2023.

But Franchot, who serves as vice chairman of the state pension board, said such a move would be a "breach of trust" with state employees, who were required to contribute another 2 percent of their pay to the pension system in the 2011 legislation.

"It is a bait-and-switch for the taxpayers because we told them we had the problem fixed," he said.

Franchot said that while the proposed changes would save the state nearly $2 billion over the next 10 years, costs would increase by $4.5 billion over the following dozen years.

Treasurer Nancy K. Kopp, who chairs the board, said she hasn't made up her mind.

"I want to make sure about those numbers and know how they were derived," she said. Kopp said the board will discuss the proposal Tuesday but won't necessarily take a position.

State Budget Secretary David R. Brinkley, also a board member, told the House Appropriations Committee on Friday that the Hogan administration opposes the idea. He said that while the state recently received AAA scores from all three bond-rating agencies, each had identified Maryland's pension system as an area of weakness.

Brinkley said the proposal would only exacerbate that problem.

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"The governor wants to ensure that our obligation to state employees and retirees is fulfilled," Brinkley said.

Del. Maggie McIntosh, the Baltimore Democrat who chairs the Appropriations Committee, said the bond rating agencies would actually prefer that the state fully adopt the actuarial funding system.

McIntosh said the proposal remains on the table as the House, which votes first on the budget this year, makes its spending decisions over the next two weeks.

"It's something we're going to discuss carefully," she said.

Appearing before the committee, Brinkley also told the panel the Republican administration does not plan to give lawmakers a detailed breakdown of the 2 percent, across-the-board spending cuts called for in Hogan's budget. Brinkley said agency heads are too busy making cuts to the current year's budget to think about the cuts they'll make to next year's.

McIntosh and her Senate counterpart, Howard County Democratic Sen. Edward J. Kasemeyer, had demanded details of specific cuts by Friday.

"We don't have details, nor do we expect details," Brinkley said. He said previous Democratic governors have proposed across-the-board cuts in their budgets without detailing them.

Baltimore Sun reporter Timothy B. Wheeler contributed to this article.

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