The County Stake In The State’s Pension

October 10, 2012

The Maryland State Pension System is made up of nine retirement plans, and local governments participate in six of those plans.  Local school system employees are members of the teachers’ pension and retirement plans.  And many other local government employees are members of the employees’ and law enforcement officers’ retirement and pension plans through their governments’ participation in the state system.  In addition, some librarians and elected officials have the option to join the state system.  The local government role as participant in these plans, and its new role as payer of teacher pension costs translate to a major county stake in the Maryland State Pension System.

Participating Governmental Units

Various types of local governments participate in the Maryland State Pension System.  According to the Department of Legislative Service’s 2010 report, 121 local governmental units, including towns, counties, and special taxing districts participate. Public library associations, fire departments, and public boards or commissions add to the number.

Local participation creates an interest in the System’s overall financial health.  For several years, and especially following the 2009 recession, there has been concern that the System was not adequately funded.  A recent law passed by the General Assembly established reforms of the System and a reporting requirement.  In addition, the law states that

The Secretary of the Department of Budget and Management shall report biennially, beginning on January 1, 2013, to the Governor and the General Assembly. . . on the financial health of the [System]. The Secretary’s report shall reflect the State system’s progress towards achieving the statutory funding goals, and shall include recommendations concerning modifications to the funding methods or benefits structure.

In 2011, the Board of Trustees reported a goal to reach approximately 80% funding by fiscal year 2023.  The current funding level was well below that ratio, as reported,

At June 30, 2011, the System’s actuarial accrued liability was $55.9 billion and the unfunded actuarial accrued liability totaled $19.7 billion, resulting in a funded status ratio of 64.7%.

Another report is expected in December 2012.

Teacher Pension Shift

The costs of maintaining the Maryland State Pension System, especially through the recent recession has created a strain on the state budget.  This year, in the final hours of a special session, the General Assembly passed the Budget Reconciliation and Financing Act (BRFA) of 2012.  Among many provisions in the $35.5 billion budget plan, the BRFA 2012 shifted the cost of teacher retirement and pension plans to county governments.

According to the BRFA, the cost shift will be phased-in initially, over four years, beginning in FY 2013.  Pension costs for each local school board differ based on the number of employees in the teachers’ system, other participants in the teacher pension such as library and community colleges employees are still funded by the state.  Local school boards will pay a total of $136.6 million in state fiscal year 2013.

When the phase-in is complete, counties will have to pay the normal contribution rate to the state pension system multiplied by the total annual compensation of all the employees in the system.  For fiscal year 2016, the total cost is estimated to be $254.8 million.  While the school boards are nominally making the direct payments to the state, the BRFA bill directs each county to make a required appropriation to its schools (above and beyond the maintenance of effort funding level already required) in an amount calculated to offset the new shared costs.

For more information, see our previous related posts:

State Pension System – Governance and Oversight

State Pension System Earnings Down for Fiscal 2012

Leave a Comment » | County Budgets, Teacher Pension Shift | Permalink
Posted by Robin Clark

Moody’s Requests Comments on Plans to Adjust Reporting of Pension Liability and Cost Information

September 25, 2012

As announced in the NACo Legislative Bulletin, Moody’s Investors Service (“Moody’s”) is requesting comment from interested parties on its plan to implement several adjustments to pension liability, asset, and cost information reported by state and local governments and their pension plans.  Comments are due by September 30.

From the Legislative Bulletin:

In addition to using a uniform 5.5 percent discount rate for all plans, Moody’s intends to apply a single, 17-year amortization period to annual pension contributions, and replace asset smoothing with the market value of assets as of the actuarial reporting date.
GASB, as the independent standard setter of generally accepted accounting principles for state and local governments, has already taken action in this area. Accordingly, it is very important that elected officials involved with the obtaining of credit ratings for municipal bonds make their concerns known to Moody’s in as direct a manner as is possible. Given that Moody’s has indicated that its proposed changes could have an impact on ratings for local governments “where the adjusted liability is outsized for the rating category and without mitigating factors such as demonstrated flexibility to respond to higher fixed costs,” it is particularly important that local officials make their voices heard.
To view the request for comment please click here.  For more information, contact Deseree Gardner of the NACo staff.

Leave a Comment » | County Budgets, Employee Benefits and Relations, Teacher Pension Shift | Permalink
Posted by Andrea Mansfield

State Pension System – Governance and Oversight

September 24, 2012

In 2012, the State began a shift of $255 million of costs associated with the Maryland State Retirement and Pension System to local governments.  This blog series, which will run over the course of the next several months, will serve to educate public officials and others on the Maryland State Retirement and Pension System (the “System”), including the county’s current stake in pension expenses; the financial health of the System; pension investment strategies, and the topic of rate of return.  In the last installment, we will share some of the possible legislative actions that MACo will seek in the upcoming session.

Maryland State Retirement and Pension System – Overview

The Maryland State Retirement and Pension System (the “System”) administers death, disability and retirement benefits on behalf of more than 350,000 active and former State employees, teachers, State police, judges, law enforcement officers, correctional officers and legislators.  Over 100 local governmental agencies voluntarily participate in the System, though the State of Maryland being the largest sponsor.

Key benefits and services on the System are survivor protection for employees who die before reaching retirement; disability coverage in the event that an employee is unable to continue working due to a disabling injury or illness; and a basic monthly retirement allowance based on the member’s age, service, and salary upon retirement with options for payment of a continuing allowance to the member’s survivor.  The System includes annual cost-of-living adjustments.

The Board of Trustees

A 14-member Board of Trustees manages the System’s multi-billion dollar investment portfolio.  The Board is made up of the following members:

Three ex officio state government officials including

  1. The Secretary of Budget and Management
  2. The State Comptroller
  3. The State Treasurer

Five representatives of the various retirement plans, elected by their membership to serve four-year terms, including

  1. A representative elected by the active members of the Employee’s Retirement System, the Employees’ Pension System, the Correctional Officers’ System, the Legislative Pension Plan, the Local Fire and Police System, and the Law Enforcement Officers’ Pension Plan;
  2. A representative elected by the retired members of the Employee’s Retirement System, the Employees’ Pension System, the Correctional Officers’ System, the Legislative Pension Plan, the Local Fire and Police System, and the Law Enforcement Officers’ Pension Plan;
  3. A representative elected by the active members of the Teachers’ Retirement System and the Teachers’ Pension System;
  4. A representative elected by the retired members of the Teachers’ Retirement System and the Teachers’ Pension System;
  5. A representative elected by the active and retired members of the State Police Retirement System

One representative of participating governmental units (mostly county and municipal governments, but also including certain independent agencies), appointed by the Governor to a four-year term

Five members of the public with experience overseeing pension systems or other similar organizations, appointed by the Governor with the advice and consent of the Senate to four-year terms.

In general, the Board of Trustees is responsible for the management, general administration, and proper operation of the System.  This includes maintaining fiduciary duty for the operation of the retirement and pension plans and making sure that all assets of the System are held exclusively to benefit the members of the System.

The Board adopts the actuarial assumptions necessary to properly fund the System and approves qualified disability retirements.  The Board also regularly adopts rules, regulations, policies, and procedures necessary to administer the various plans.  The Board of Trustees also exercises oversight of the Maryland State Retirement Agency by its authority to appoint the Agency’s Executive Director and Chief Investment Officer.

The Board of Trustees appoints boards and committees to advise it on specific and technical matters.  These include the Investment Committee, an actuary, and one or more medical boards.  The Board designates a medical board to arrange and evaluate medical examinations required by the System plans and to investigate applications for disability retirement. Each medical board is composed of three physicians ineligible to participate in the System.

Though not legislatively required, the Board of Trustees have appointed an administrative committee to review issues that require additional study and report back to the full Board.  The Board has also created an audit committee, a corporate governance committee, and a securities litigation committee.  Current Board members and committee members may be found here.

The Maryland State Retirement Agency

The Maryland State Retirement Agency operates under the supervision of the Board of Trustees, and its Executive Director is appointed by the Board.  The agency’s five divisions, administrative, finance, investment, internal audit and information services operated with a $29.9 million budget in fiscal 2010. The investment division of the agency is responsible for the management, control, and investment of the System’s funds, and maintaining the equity and bond index funds, the self-liquidating bonds and the reinvestment reserve.  The investment division’s Chief Investment Officer, who is a direct appointment of the Board, has the authority to hire and fire asset managers.

Legislative Oversight

Since 1975, the General Assembly has exercised oversight of the State Retirement and Pension System.  The President of the Senate and the Speak of the House of Delegates each appoint members to an interim Joint Committee on Pensions.  This committee’s membership is typically drawn from the Senate Budget and Taxation Committee and the House Appropriations Committee, which handle pension legislation during the regular session.

Recent legislation passed by the General Assembly has modified the System in an effort to reduce its cost and to shift costs to local governments.  The Assembly passed Chapter 397 into law in 2011, increasing member contributions, linking cost-of-living adjustments to investment returns, and increasing vesting and retirement eligibility requirements for the System.  Then, in 2012, the Budget and Reconciliation and Financing Act shifted funding responsibility of pension costs for local school, library, and community college personnel who are members of the Teachers’ Retirement System or Teachers’ Pension System to local governments.  Both of these legislative changes will be described in more detail in subsequent articles in the blog series.

Two thorough documents dealing with the roles of the Board and the Executive Director are also available online from the System website, for fuller detail on these structures:

Charters –This document defines the Board of Trustees and its functions and responsibilities as overseers of the System.

Governance Policy — This document describes the manner in which the members of the Board of Trustees conduct themselves in their respective duties and the governance rules for the Board as a whole.

1 Comment | County Budgets, Education, Employee Benefits and Relations, Teacher Pension Shift | Permalink
Posted by Robin Clark

Wisconsin Judge Strikes Down Limitations Placed on Collective Bargaining Rights

September 17, 2012

A Circuit Court Judge in Wisconsin has struck down a law limiting collective bargaining, finding it unconstitutional.  As reported by the Milwaukee-Wisconsin Journal Sentinel, Judge Colas of Dane County, Wisconsin, raised an issue with treating non-union and union employees differently, among others.  With Maryland among the many states addressing employee pensions and benefits as part of long-term budget resolutions, the impacts of the Wisconsin case will be watched closely.

In Madison Teachers Inc. v. Walker, Judge Colas found that parts of Wisconsin’s Act 10, signed into law in March 2011, violated rights of free speech, association, and equal protection granted by the U.S. Constitution.  The court struck down Act 10′s prohibitions against municipalities offering base wage increases greater than the cost of living to union employees and against collectively bargaining with unions on conditions of employment other than wages.  The Court also found that the law violated the City of Milwaukee’s home rule under the Wisconsin Constitution by barring the City from paying the employee share of the contributions to its employee retirement system.

Opinions are divided regarding how the decision will hold up on appeal. As the Journal Sentinel describes,

The (court) paper is going to be flying,” said Lester Pines, an attorney for a Madison teachers union. “This case will be continuing in litigation . . . but we’re confident that this law is unconstitutional and will remain unconstitutional.”

In a statement Saturday, Republican Attorney General J.B. Van Hollen said, “We believe that Act 10 is constitutional in all respects and will be appealing this decision. We also will be seeking a stay of Friday’s decision pending appeal in order to allow the law to continue in effect as it has for more than a year while the appellate courts address the legal issues.”

With the appeal now pending, local officials are aware that more changes could be ahead.

Leave a Comment » | Employee Benefits and Relations, Teacher Pension Shift | Permalink
Posted by Robin Clark

State Pension System Earnings Down for Fiscal 2012

July 30, 2012

While the Maryland State Retirement and Pension System reported that its fiscal 2011 returns were positive, a 20.04% performance, the System only earned .36% for fiscal 2012.  This low performance is tied to returns on public equities.  From MarylandReporter.com:

Maryland’s $37 billion state retirement and pension system for employees and teachers earned only .36% on its investments in the fiscal year that ended June 30.

This is far below the 7.75% that is the system’s target. “The last 12 months presented a challenging environment for investors, particularly in international equity,” said chief investment officer Melissa Moye. “Most of the system’s assets added value to the fund, offsetting the negative impact of public equity for the year.”

Most of the asset categories in the fund, from cash to real estate, had positive earnings of 3% to 8%. But publicly traded stocks, which represent 42% of the portfolio, were down almost 7%.

However, some say that low investment returns in one year are not a cause for concern.  As reported by the Gazette:

But disappointing investment returns in any one year aren’t necessarily cause for alarm, said Keith Brainard, research director for the National Association of State Retirement Administrators.

“We tend to focus on longer time frames,” Brainard said.

State Treasurer Nancy K. Kopp, who chairs the system’s board of trustees, emphasized in a statement Friday that looking at long-term performance is crucial.

“Taking the long view, the system has on average exceeded the assumed rate of return over the last 25 years,” Kopp said in the statement.

1 Comment | Finance and Procurement, State Budget, Teacher Pension Shift | Permalink
Posted by Andrea Mansfield

Rating Agencies Affirm Maryland’s Triple-A Bond Rating, But Note Fiscal Challenges

July 23, 2012

State Treasurer Nancy K. Kopp recently announced that all three bond rating agencies, Moody’s Investors, Fitch Ratings, and Standard and Poor’s, reaffirmed Maryland’s triple-A bond rating.  This has been done in preparation for a General Obligation Bond sale, which will take place at the Board of Public Works meeting on August 1, 2012.  From the press release:

Treasurer Kopp said, “Today’s recognition of Maryland’s fiscal strength and prudent management is welcome news. While Maryland has historically received AAA ratings from the three major bond rating agencies, given the national uncertainties surrounding both the federal deficit and the economic recovery, we are pleased the rating analysts recognize Maryland’s strong, stable and prudent financial management.”

“Retention of the Triple AAA ratings allows us to continue to save millions of taxpayer dollars resulting from the low interest rates achieved because of these ratings,” Treasurer Kopp said.

However, all three rating agencies noted fiscal challenges tied to the economy and the state’s pension liabilities. As reported by MarylandReporter.com:

The big three New York bond rating agencies last week again affirmed Maryland’s almost sacred triple-A bond rating, attributing the decades-old stamp of approval to a strong economy, high incomes, prudent fiscal management and a willingness to raise taxes.

But as they have for recent bond issues, the three agencies said the state government continues to face financial challenges from its above-average pension liabilities and likely federal budget cuts, along with an increasingly sluggish economy.

Leave a Comment » | Finance and Procurement, Teacher Pension Shift | Permalink
Posted by Andrea Mansfield

Opinion Piece Discusses Investment Strategies and Management of State Retirement and Pension System

July 11, 2012

In an opinion piece for the Baltimore Sun, George Liebmann, volunteer executive director for the Calvert Institute for Policy Research, shares his views on the investment strategies and management of the Maryland State Retirement and Pension System.

Maryland’s pension problems are a legacy of the Glendening administration’s mishandling of investments and deferral of contributions, the Ehrlich administration’s capitulation to the teachers’ unions, and the O’Malley administration’s failure to face facts, capitulation to various rent-seekers, and efforts to use risky investments to reach unattainable targets. They are a cumulating drag on the state’s ability to provide essential public services and will reach crisis stage when the GASB’s new accounting rules become effective and bond rating agencies take note of the magnitude of the Maryland pension deficit.

1 Comment | Employee Benefits and Relations, State Budget, Teacher Pension Shift | Permalink
Posted by Andrea Mansfield

State Pension System – Updated Performance Improves Perspective On Maryland System

July 3, 2012

Substantial recent news coverage, including on Conduit Street, of a report by the Pew Center on the States has raised attention to the funding status of state-run pension systems and retirement benefits. With the recent shift of the normal costs of the pensions for teachers to county governments (note: this does not include the costs directly attributable to the systems’ unfunded liability), county officials have gained a heightened interest in such matters.

A recent response (June 28) from the National Council on Teacher Retirement offers some additional perspective on this data, including a view that the Pew reports’ reliance on FY 2010 data unfairly skews its conclusions by omitting the more recent strong returns from equity markets, where most public pension systems are substantially invested. From the NCTR blog site:

However, the Pew report’s analysis uses old data that fails to reflect recent market gains. As Keith Brainard, NASRA’s Director of Research, points out, by relying on FY 2010 data, “the dates the Pew study is using to measure the condition of many public pension plans are near the low point of the recent investment market decline.” Nearly one-half of plans in the NCTR/NASRA Public Fund Survey have an actuarial valuation date that pre-dates their fiscal year-end date, usually by one year, Keith notes.
Also, in order to arrive at the $1.38 trillion figure, Pew once again combines pensions with retiree healthcare. As NCTR and NASRA have noted in the past, retiree healthcare cost containment options, financing structures and benefit protections are entirely different from those of pensions. Pew’s decision to couple retiree healthcare with pension liabilities distracts from the issues States face with these very different benefits.

Finally, as Pew itself notes, its report does not reflect the many actions that States have taken in 2010 and 2011 to address plan sustainability, including benefit cuts. The condition of some states “may have improved because of those reforms,” Pew concedes.

As most Maryland stakeholders will recall, Maryland effected a series of reforms to its retirement and pension systems during the 2011 legislative session, embedded in that year’s budget reconciliation act and detailed in the DLS 90 Day Report. The net effects of these changes will serve to lessen the state’s unfunded liability — from the 90 Day Report:

The pension reform provision of the BRFA of 2011 establish a goal of reaching 80% actuarial funding within 10 years by reinvesting a portion of the savings generated by the benefit restructuring into the pension system in the form of increased State contributions above the contribution required by statute. In fiscal 2012 and 2013, all but $120 of the savings generated by the benefit restructuring are reinvested, with the $120 million dedicated to budget relief each year. Beginning in fiscal 2014, the amount reinvested in the pension fund is subject to a $300 million cap, with any savings over that amount dedicated to budget relief.

The Maryland State Retirement and Pension System reports that its FY 2011 returns have been positive, and also have advanced the position of the state-run system. The Market Value and Investment Performance data for the 12 months ending June 30, 2011 showed a 20.04% performance, and a $37.5 billion market value, both documenting substantial gains since the “snapshot” used for the Pew report.

Another source for running dialog on pension issues is Pension Dialog, which details information on pensions in the news, but also on the mechanics of public pension systems generally.

Leave a Comment » | Employee Benefits and Relations, State Budget, Teacher Pension Shift | Permalink
Posted by Michael Sanderson

Montgomery Already Facing $71 Million Shortfall For FY14

June 26, 2012

In the wake of a difficult FY 2013 budget, Montgomery County now measures its FY 2014 shortfall at some $71 million. From coverage in The Washington Post:

Montgomery County officials said Monday that the county faces a $71 million shortfall for the fiscal 2014 budget for public safety, transportation and other government agencies.

The budget gap is caused by expected increases in government debt payments and retiree health benefits, county officials said. Also contributing are recent changes in state law that shifted some of the cost of rising teacher pensions from the state to counties, forcing jurisdictions to maintain what are among the nation’s highest levels of per-pupil school spending.

Leave a Comment » | County Budgets, Education, Taxes and Revenues, Teacher Pension Shift | Permalink
Posted by Michael Sanderson

Pew Study: State Retirement Systems Underfunded, Maryland Among Problems

June 25, 2012

A recent report by the Pew Center On The States details state pension system underfunding, chronicling over $1 trillion in unfunded liabilities across the state-run systems.

From the report:

The gap between the promises states have made for public employees’ retirement benefits and the money they have set aside to pay these bills was at least $1.38 trillion in fiscal year 2010, according to Pew’s latest comprehensive analysis on pension and retiree health care funding.

The full report details the nationwide issues, while a state fact sheet for Maryland identifies the shortfall for the state0run system, in which many local jurisdictions participate, and whose costs were substantially shifted to counties as part of the FY 2013 budget resolution.

From the Maryland summary:

Maryland’s retirement plans had a liability of $71 billion and the state has fallen $36 billion short in setting aside money to pay for it.

1 Comment | County Budgets, Employee Benefits and Relations, State Budget, Teacher Pension Shift | Permalink
Posted by Michael Sanderson

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