House Kills Troubling Pension “Assignment” Bill

March 20, 2014

HB 1201 State and Local Retirement and Pension Systems – Assignment of Benefits to Trust for Disabled Individuals received an unfavorable report from the House Appropriations Committee. The Senate crossfile, SB 403, has not moved out of its committee. The bill provided that a retiree or beneficiary of a county or State retirement may have their retirement allowance assigned to a special needs trust established for their benefit.

MACo opposed the legislation, citing concerns with the new financial and administrative burdens the bill presented, including the need for outside legal counsel.

Sixteen of Maryland’s twenty-four county governments administer their own retirement systems either for general employees or selectively for law enforcement and correctional officers. Under this bill, those counties could be required to pay a certain retirement allowance into a supplemental needs trust for a disabled retiree or beneficiary if requested and verified by the retirement plan administrator. As drafted, the bill requires counties to adopt a new definition for disabled and administer a new process for assignment of benefits. These changes complicate retirement plan administration and create new financial and administrative burdens, including the need for outside legal counsel.

The State Retirement and Pension System Board of Trustees also opposed the legislation, stating that,

The board’s opposition is primarily due to its concerns that as [the bill] is currently drafted, it may violate certain requirements of the Internal Revenue Code (IRC) which could in turn raise issues regarding the System’s tax qualified status.

For more information, see the bill text, the bill information page, the fiscal note, and opposition testimony to the bill and its crossfile, SB 403, from MACo and the State Retirement and Pension System Board of Trustees.


State Policy Changes Boost Teacher Pension Costs

January 31, 2014

According to a budget analysis prepared by the Department of Legislative Services, “local governments should continue to plan for a higher-than-forecast normal cost rate in fiscal 2017.”  This increase in normal costs is due to a change in demographic assumptions used to calculate pension liabilities. It is estimated that local school board contributions will increase by a projected $73.3 million beginning in fiscal 2017.

The budget analysis explains the effect of these changes in actuarial assumptions:

The board of trustees voted in spring 2012 to adopt the recommendations of its actuary to change a variety of demographic assumptions used to calculate pension liabilities. The new assumptions related to rates of retirement, disability, withdrawal, and mortality were first applied to the June 30, 2012 actuarial valuation, which is the basis for the calculation of employer contribution rates for fiscal 2014. The changes vary extensively across different plans within SRPS, as well as by age and accumulated service credit, reflecting actual trends in those rates identified by an experience study completed in 2011. The net effect, however, was an increase in the value of service credit earned by SRPS members. This is reflected in an increase in the normal cost, which is the value of pension benefits earned in a given year by members.

The analysis further details how these costs are borne directly by school boards, but with a required appropriation (with annual dollar amounts written directly into the enacting bill) from county governments as an offset.

Chapter 1 of the first Special Session of 2012 requires local school boards to pay a portion of the normal cost for their employees who are members of TRS/TPS. Prior to that, the State paid 100% of the annual employer contribution on behalf of teachers in the State. Based on 2012 projections of the normal cost, local school boards pay 50% of the normal cost in fiscal 2013, phasing up to 100% of the normal cost by fiscal 2016. For those four years, Chapter 1 specifies the exact dollar amount to be paid by each local school board based on the projected normal cost and the local share of that cost. Beginning in fiscal 2017, however, local school boards must pay 100% of the actual normal cost. It bears noting that beginning in fiscal 2013, Chapter 1 also requires county governments and Baltimore City to adjust their maintenance of effort payments to local school boards to compensate them for teacher pension costs. Beginning in fiscal 2017, the fiscal 2016 payments by the counties are included in subsequent years’ maintenance of effort calculations, so local school boards are responsible for any increase in normal cost payments between fiscal 2016 and each succeeding year.

The budget analysis also provides a chart showing the increase for each county.

A complete listing of all fiscal 2015 budget documents affecting county governments can be found on MACo’s website under Research, then Budget and Finance.


Teacher Pension Liabilities Stay With State Under New GASB Rules

January 17, 2014

The Executive Director of the State Retirement Agency recently confirmed that county governments do not need to report the state teacher pension fund’s unfunded liabilities, despite the teacher pension shift.  As he described in a hearing before the Senate Budget & Taxation Committee, the state pension fund’s unfunded liabilities will not be reflected on county governments based on the new Governmental Accounting Standards Board (GASB) Rule 67. Counties had concerns that their new funding responsibility for the teacher pension system could be misconstrued as an assumption of liabilities and negatively affect county bond ratings.

Following the pension shift, the Executive Director of the State Retirement Agency contacted GASB to ask them about Maryland’s scenario.  The initial response was that the counties would be required to show their proportionate share of the unfunded liabilities for the teachers, and incoming revenue offsetting that liability in their financial statements.  Once the new GASB rules were finalized, however, the Director wrote to GASB to ask the question again asking specifically if the way that Maryland is funding the teacher’s liabilities created a “special funding situation.”  This time, GASB agreed and assured the Director that

Maryland’s 24 subdivisions will not be required to disclose and report their proportionate share of the State teacher pension plan’s unfunded liablities.  Those liabilities will appear on the State’s financial statements only.

The Director recently sent a letter to each of the Chief Financial Officers of the Local Education Agencies and counties to inform them of GASB’s response. This decision accurately reflects the fact that county governments did not assume responsibility for the unfunded liabilities of the system when they took on a share of the teacher pension’s normal costs.  To listen to Director testify before the Senate Budget & Taxation Committee on January 16, 2014, click here.


Governor’s Budget Repeats Cut in Pension Funding

January 17, 2014

The proposed FY 2015 budget has stirred controversy by permanently dropping the amount of pension savings to be reinvested into the system to advance it toward an adequate funding status. This $100 million change per year, part of the plan to address the general fund’s structural deficit, may have direct cost consequences for counties that participate in the state pension system, and may add pressure to the system into which all counties now make substantial payments to offset teacher pensions.

The General Assembly has made several reforms in the past few years to address growing unfunded liabilities of the pension system.  These changes have included reducing costs by downgrading member benefits, shifting teacher pension system costs to county governments, and increasing funding by setting aside additional money in the State budget to pay down the System’s liabilities.

Last year, however, the additional money set aside to pay down the System’s unfunded liabilities was reduced from $300 million to $200 million.  The $100 million difference was held back in case the State needed to provide support for any programs but by sequestration.  Now for FY 2015 (and beyond), the Governor has pulled back $100 million from the monies intended to pay down the pension liabilities again to support the general fund. As described by the Reporter,

When cuts to benefits and increases in employee contributions were passed in 2011, the state agreed to put an additional $300 million a year into the state pension system. That was cut to $200 million this year and now also in the proposed budget, allowing $172 million in “spending reductions” to be used for other programs.

According to testimony of the Executive Director of the State Retirement and Pension Agency in the Senate’s Budget & Taxation Committee yesterday, Maryland is one of the only, if not the only state in the union that has a provision in law requiring reinvestment of earnings to pay down the unfunded liability of its pension fund.  The Director noted, however, that the Governor of Massachusetts is putting additional money towards the state pension system this year.  The current net pension liability of the Maryland State Retirement and Pension System is $18.8 billion.

For more information, see Analysis: Putting a different spin on $39 billion state budget, and Unions, pension board unhappy O’Malley cut $100M in promised payment to retirement fund from the Maryland Reporter and Governor’s Budget: No New County Reductions, Limited New Funding, State Budget Provides $100m Hedge Via Pension Funding, Advisor Disappointed in Potential Pension Funding Cut, Senate Pension Funding Plan – Long Term Fix, Short Term Cut, and Pensions Committee Discusses Rates, Rules, and Recommendations from Conduit Street. To listen to the recent briefing from the Senate Budget & Taxation Committee, click here.

(editing note – a previous version of this article stated that the Director of the State Retirement Agency recommended reducing the annual reinvestment amount to $200 million; this is incorrect.  In fact, the State Retirement Agency recommended maintaining the $300 million commitment. A corrected version of the article is above.)


Detroit Decision: Pensions Can Be Cut in Bankruptcy

December 3, 2013

As reported in Governing, a Detroit bankruptcy judge has sided with the city in ruling that pensions could be subject to cuts under Chapter 9 bankruptcy protection. As described:

Rhodes, who spent one and a half hours delivering his opinion from the bench, concluded that the city’s pension debt was similar to other creditor debt and that any state constitutional protections for pensions did not apply in federal bankruptcy court. Unions have argued that pensions, which are protected under Michigan’s constitution, cannot be impaired. Detroit’s claim is that state constitutional protections no longer hold in federal bankruptcy court and that pension payments can be cut like any other debt to creditors.

“Nothing distinguishes pension debts from other municipal debts, notwithstanding the state constitution,” Rhodes said, according to media reports. He added that “it has long been understood that bankruptcy law entails the impairment of contracts … [and] pension rights are contract rights under the Michigan constitution.”

For more information, see the full story from Governing.

Prior articles in Governing and elsewhere have emphasized that bankruptcy filings by US municipalities are extremely rare, and the accessibility of bankruptcy varies from state to state.  While in Michigan, Chapter 9 filing by municipalities is authorized, in Maryland, no Chapter 9 authorization is outlined.

For more information on how many municipalities have filed for bankruptcy, see the full story from Governing.  For more information on bankruptcy laws nationwide, see the full story from Governing.

Nonetheless, today’s decision is being called a landmark in pensions law.  As reported in the New York Times lawyers and union representatives are discussing its potential precedent-setting effects,

Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System, was blunt in his assessment. “This is one of the strongest protected pension obligations in the country here in Michigan,” he said. “If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone.”

For more information, see the full story from the New York Times.


Pensions Committee Discusses Rates, Rules, and Recommendations

November 22, 2013

On the November 19 meeting of the Joint Pensions Committee, the Committee heard reports on fiscal 2015 contribution rates, Title 37 Non-Contributory System Transfers, and the new GASB standards.  Over the course of the meeting, the Committee discussed participating governmental unit contributions rates, recommendations regarding transfers from between state and county pension systems, and the effect of the GASB standards on county reporting of unfunded liabilities following the teacher pension shift.

The Joint Pensions Committee also expressed interest in discussing the functioning and future of the pension system as a whole.  Senator Kasemeyer, in particular, asked the representatives of Gabriel Roeder Smith & Company, consultants to the Maryland State Pension Board of Trustees, for their assessment of the pension’s sustainability over the next fifty years.  Paul Zorn, Director of Governmental Research at Gabriel Roeder Smith, stated that based on the plan benefit changes the General Assembly has enacted and outside another large market crash, there is no reason to think that the system cannot sustain.  He also noted that issues with sustainability often spur from deferring contributions, and noted the importance of Maryland phasing out the “corridor” funding method. For additional information on this see these previous Conduit Street posts: Joint Pension Committee Seeks to Phase Out Corridor Funding; Senate Pension Funding Plan – Long Term Fix, Short Term Cut.

Contribution Rates

Since the teacher pension shift, counties also now contribute a share of the normal costs of the state teachers pension system. At the Joint Pensions Committee meeting, consultants presented their annual results of the valuation of the fiscal 2013 actuarial valuation and fiscal 2015 contribution rates to the Committee.  This report included the finding that because of a slightly more favorable experience in the year ending June 30, 2013, leading to slightly lower illustrative contributions on fiscal 2015, despite increases in payroll such as the 1.7% increase in actual teacher payroll in 2013. Until 2017, counties will pay a fixed amount of normal costs of the teacher pensions, as defined by statute.

The consultant will complete its methodology for the allocation of the plan’s net pension liability (a new calculation spurring from the GASB changes) and annual pension expense to each participating governmental unit by June 2014.

Title 37 Non-Contributory System Transfers

The Legislative Director of the State Retirement Agency and staff to the Budget and Tax Committee presented an overview on Title 37 transfers, or transfers between employees of different state and local pension systems.  MACo was asked to survey our membership on this topic and for inclusion of our feedback in this overview.   The overview accurately represents that almost all of the counties who responded reported very little transfer activity and no concern with the current law.

Title 37 provides that when an employee transfers from a contributory plan to a non-contributory plan, upon their transfer, the non-contributory plan should reimburse the employee (if requested by the employee) for their accumulated contributions, including regular interest on the contributions they made while a member of the contributory plan. If an employee moves from a non-contributory to a contributory plan then at the time of retirement, the employer would calculate the value of the employee’s deficiency applying regular interest.  “Regular interest,” as described in the overview, has been found to be analogous to the rate the local system pays on its member contributions.  The overview recommends that the law is maintained to provide portability and uniformity.

Unfunded Liability Reporting Under the New GASB Rules

According to Graylin Smith, Managing Partner at SB & Company, another consultant, counties will not have to report any unfunded liabilities in the teacher pension fund, despite the teacher pension shift of normal costs, based on the new GASB rules.  Upon hearing this report, Senator Brinkley asked for a statement to this effect in writing from GASB.  In response to the Senator’s request, Treasurer Kopp noted that this information had also only recently been reported to the Board of Trustees, and the Board would be seeking an authoritative statement from GASB.

The final meeting of the Joint Pensions Committee will be held on December 11, 2 pm in the House Appropriations Committee Room.  That meeting will be a decision meeting.  Additional materials from the November 19 meeting include the Department of Legislative Services’ Annual State Retirement and Pension Systems Investment Overview.


Pension Board Presents 2014 Legislative Proposals

November 1, 2013

At its October meeting, the Joint Committee on Pensions heard a presentation of legislative proposals submitted by the Maryland State Pension Board of Trustees.  The proposals may be described as a collection of technical changes to the existing pension law, many of which serve to bring uniformity to the code.

The next meeting of the Joint Committee on Pensions will be held on November 19 in Annapolis.  At this meeting, the Board will hear how the 2007 change in Title 37-203(f) of the pension transfer law has been implemented.

A brief description of a few of the Board of Trustee’s proposals:

Re-employment – Earnings Limitations

Extends the $25,000 cap on earnings to retirees of the Local Fire and Police System State Retirement Plan (LFP).  The old cap on earnings was set at $10,000 so this raises the cap. The law will also reduce the number of years a retiree is subject to the cap from 9 year to 5 years for LFP retirees. The LFP plan was closed in 2004 so it was inadvertently overlooked when the cap was changed on other plans.

Law Enforcement Officers’ Pension System and State Police Retirement System DROP – Special Disability Retirement Allowance

If someone is awarded a special disability retirement from the State Police, that retiree cannot elect to participate in the DROP because it is not reasonable that the member would be permitted to continue working.

Former Non-Vested Members – Interest on Accumulated Contributions

An individual is still considered a member of the State Retirement and Pension System for four years after he or she leaves employment with a participating employer.  However, four years after leaving employment with a participating employer in the State Pension System, a non-vested member will stop accumulating regular interest on his or her member contributions.  The Board suggests codifying this practice.

Re-employment – Late or Non-Reporting Penalties

Currently, when a school system reports that a retiree is eligible to participate in the Retire/Rehire program when an employee is not actually eligible, the school system must pay the State Retirement Agency the reemployment earnings offset that would have been taken from that retiree if that individual was not reported as exempt.  The school system pays a similar penalty for failing to report or reporting late that an individual is participating in the Retire/Rehire program. The State Retirement Agency has charged schools as much as $25,000 for failures to report in the past. The Board recommends changing this rule to charge a consistent penalty of $50 per month for each month the local school system fails to make a correct report, not to exceed $1,000 per employee.

For more information, see the BoT Legislation Proposals 2014 or contact Robin Clark at MACo.


Report Critiques Politics of Pension Funding

October 31, 2013

The Maryland Reporter recently featured a new report from the Maryland Public Policy Institute (MPPI).  As described by MPPI, “The mission of the Maryland Public Policy Institute is to formulate and promote public policies at all levels of government based on principles of free enterprise, limited government, and civil society.”

The report, “Perpetual Shortfall: Maryland’s Pension and Benefit Funds”  found that some Maryland county government pension systems have a greater level of funding than the State Pension System and points to the politics of funding pensions as the “root cause” of the issue.  As described in the report,

The root cause is that political leaders are unwilling or unable to consistently allocate the required funding for pension systems on an annual basis.  State and local budget repeatedly shortchange pension funds for years on end, resulting in large unfunded liabilities. . .

Since the stock market crashes hurt Maryland’s State Pension’s funding levels, Maryland’s General Assembly has passed legislation to reduce the costs of the system by raising employee contributions to 7%, delaying pension vesting from five to ten years, and requiring the last five highest years of salary, rather than the last three, to be used in calculating retirement benefits.  This past year, they passed legislation to phase out the corridor method which was leading to chronic underfunding.  In 2012, the state legislature transferred some of the system’s costs to county governments, through the Teach Pension Shift.

The Maryland Reporter spoke with the State Retirement Agency about the report.  As described in the article,

Told of the major findings of the study, the chief of the State Retirement Agency said much of it was old news. The study disregarded fixes made in pensions for state teachers and employees in 2011, and reform of funding mechanism passed just this year, he said.

“While liabilities are expected to grow in the next few years, based upon all the actions taken, the liabilities are expected to begin declining in FY 2017 and will continue to do so each year thereafter,” Dean Kenderdine, executive director of the State Retirement Agency, said in an email. “The system expects to be 80% funded by FY 2024.”

For more information, see the full story from the Maryland Reporter and our previous coverage on Conduit Street.


Report: Decline in Funded Status of City/County Pension Plans

September 25, 2013

As reported by Pensions & Investments online, the aggregate funded status of local government pension plans was 69% for the 2012 fiscal year, down 11 percentage points from the previous year, according to a report from Wilshire Associates on 106 city- and county-sponsored defined benefit plans.

Of the 105 plans that reported actuarial values on or after June 30, 2012, the funded status plummeted despite pension assets increasing by 2% to $387 billion for the 105 plans. Liabilities increased at an astronomic 16% rate to $560.6 billion.

“On the liability side, they’re growing at a rate that the assets can’t keep up with,” said Russell Walker, vice president and co-author of the report, in a telephone interview.

However, Mr. Walker estimated the aggregate funded status could be up to 75% for the 2013 fiscal year, mentioning diversification of assets and efforts to rein in liability growth as two helpful factors.

For more information, see the full story from Pensions & Investments.


Pension Funding: Guide for Elected Officials

September 19, 2013

As reported by Governing, the latest Governmental Accounting Standards Board rules on pension reporting reveal that funding decisions are in the hands of local decision-makers. To assist county officials and others, the National Association of Counties (NACo) and partners, recently released a “Guide for Elected Officials.”

The Guide provides key facts about public pension plans, why it is essential to have a pension funding policy, a brief overview of the new GASB standards, and which issues state and local officials need to address. The guide also offers guidance for policy makers to use when developing their pension plan’s funding policy.

The 7-page guide includes numbered checklists of key policy objectives for funding policies, and a breakdown of actuarial cost and asset smoothing methods, and amortization policies, and a list of resources.

For more information, see the full guide.


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