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.

Study Recalculates State Pensions Liabilities

September 4, 2013

State Budget Solutions, a nonpartisan nonprofit with the mission of reforming governments’ approach to budgeting, recently released a report on state pension liabilities that shows large liabilities for state government pensions.   The report uses a dramatically different basis for expected growth in invested assets — pinning them to the current 15-year Treasury bond yield of 3.2 percent, a “far more conservative rate of return than the 7-to-8-percent over 20 or 30 years commonly used by most governments in their financial reports,” according to Governing magazine. By assuming very modest growth in long-term investments, the report concludes that all public systems are massively underfunded.

The report, using this different approach to calculate expected asset growth, then concludes that state systems’ funded ratios (a mark of the health of their pension funds) are between 24% and 57%.  According to the report, Maryland falls somewhere in the middle, with a 34% funded ratio through that analysis.  By contrast, when employing its more conventional market-based rate of return assumptions to project asset growth, the 2012 Comprehensive Annual Financial Report of the Maryland State Retirement and Pension System put the funded ratio around 64%, stating, “The System’s funded ratio decreased from 64.7% at June 30, 2011 to 64.4% at June 30, 2012.”  This Spring, however, the State Pension Board decided to lower its predicted rate of return from 7.75% to 7.55%, which will affect future funded ratio calculations.

The report references new standards that GASB and Moody’s will be using this year, stating,

With their rejection of an unsatisfactory approach to calculating public pension liabilities, GASB and Moody’s have joined a chorus of financial economists and other observers warning that pension funding practices are dangerous for both taxpayers and public employees alike. Despite this progress, many discordant perspectives remain on the true size of these funding gaps.

For more information, see the full story from Governing, the full report, and our previous posts on Conduit Street:

Pension Board Lowers Investment Target

Report Puts Pension Funding Gap In New Light

Moody’s Bond Rating Changes Could Affect Counties

A Closer Look at State Pension Funding




Linda Herman Appointed to State Pension Board

July 31, 2013

Linda Herman, Executive Director of the Montgomery County Employees’ Retirement System, was appointed by Governor O’Malley last week to the Maryland State Pension System Board of Trustees.  Ms. Herman was among the nominees recommended to the Governor by MACo to fill the newly created role representing the interests of county governments.

The Board of Trustees manages the System’s multi-billion dollar investment portfolio, and is responsible for the management, general administration, and proper operation of the System. Ms. Herman will be filling a new position on the Board, established by legislation passed last year as a result of MACo’s initiative to bring a county voice to the Maryland State Pension System.  The teacher pension shift of 2012 created a new stake for counties in the Maryland Pension System, and now counties will have a new role in its oversight.

MACo Executive Director Michael Sanderson expressed pleasure with the appointment, noting “Linda Herman will bring a great wealth of expertise in both investments and retirement programs to the Board, and I know she will add value to both the system and the county governments who pay into it.”

Each member of the Board has a 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.  As part of their work, the Board adopts the actuarial assumptions necessary to properly fund the System and approves qualified disability retirements.  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.

Ms. Herman has years of experience with both Montgomery County and the Washington Suburban Sanitary Commission, overseeing both a full set of retirement offerings and their associated investments. From 1999 to her appointment as Executive Director, Ms. Herman served as Senior Investment Officer for the Board. She has been responsible for managing the investment programs for the County’s defined benefit, defined contribution and deferred compensation plans.

Prior to joining Montgomery County, Ms. Herman worked for 26 years for the Washington Suburban Sanitary Commission (WSSC) including seven years as Manager of Retirement and Investments. In that position, she was responsible for overseeing the administration and investment programs for the WSSC’s pension plan and its $1.5 billion short-term cash investment portfolio. Ms. Herman holds a Bachelor of Science degree in accounting from the University of Maryland.

For more information on MACo’s initiative, see previous Conduit Street posts:

Difficult Session Yields County Successes

MACo’s Pension Bill Clears Senate Hurdles

House Moving MACo’s Pension Bill

Treasurer Kopp: No Policy Concerns With Pension Board Seat

MACo Urges “Seat At The Table” on Pension Board

Pension Report Draws Criticism

July 11, 2013

As reported in Pensions and Investments, a study of money management fees paid by state pension systems released Tuesday by two Maryland think tanks is drawing criticism from pension executives for its methodologies and conclusions.

The study was conducted by the Maryland Public Policy Institute and the Maryland Tax Education Foundation.  It found that some public employee pension plans paying the highest investment fees are not generating the highest returns.  As reported in MoneyBeat, the Wall Street Journal’s Blog,

On average, 10 states paying the most money management fees had lower investment returns between June 30, 2007 and June 30, 2012 than 10 states paying the fewest fees.

With regard to Maryland, the Maryland Public Policy Institute report states that,

For the fiscal 2012 year, the State of Maryland spent $241 million on Wall Street money management fees, or 0.64% of beginning assets of the period. These fees as a percent of assets were higher than the 46 state median.

Pension executives from Maryland and North Carolina have critiqued the report, pointing to errors in its calculations:

The study used incorrect numbers that essentially double-counted the North Carolina pension fund’s management fees, skewing them by $218 million,” said spokesman Schorr Johnson in an e-mail. The fiscal 2012 Operations Report of the $81.1 billion North Carolina Retirement Systems, Raleigh, shows fees of $317 million, which would make North Carolina’s cost ratio about 0.42%, Mr. Johnson noted. Treasurer Janet Cowell, the sole trustee, is seeking a correction from the think tanks.

Michael Golden, spokesman for the $40.6 billion Maryland State Retirement and Pension System, Baltimore, said that in addition to “egregious errors” in a similar report a year ago that have not been corrected, this year’s median of fees paid was skewed by underreporting in other state systems. “If the numbers are wrong, you can’t really compare,” Mr. Golden said in an interview.

For more information, see the full story from Pensions and Investments. For more information on the Maryland Public Policy Institute Report, see the MoneyBeat blog, or the complete report, Wall Street Fees, Investment Returns, Maryland and 49 Other State Pension Funds.

A Closer Look at State Pension Funding

July 8, 2013

A recent Washington Post editorial asserts that Maryland’s pension and retirement fund may need a closer look based on a May report by Moody’s.  The Moody’s report uses new methodology to determine pension funding and couches state pension indebtedness in the context of state governmental revenues.  The letter references the report, stating,

Maryland had the ninth-biggest unfunded liability, according to Moody’s: $28.6 billion in fiscal 2011. This is about $8 billion higher than the state reported last year based on its assumed 7.75 percent return on investment.

The Moody’s report is based on 2011 data, and thus does not reflect legislative changes that the General Assembly has made in recent years to reduce pension costs and eliminate the corridor funding method.  In the report, Moody’s recognized Maryland’s progress in that area, stating,

Maryland shifted to a corridor funding method, which phases in changes in [actuarially required contributions] ARC, in 2002. In response to subsequent deterioration of the pension plan’s funded status, the 2013 legislative session enacted a new plan to gradually return to full ARC payments over 10 years.

The Post editorial also notes the Moody’s numbers do not reflect the subsequent impact of reforms enacted over the last three years by Gov. Martin O’Malley and the General Assembly.  The editorial maintains, however, that “they still have work to do.”

For more information on the Moody’s report, see the letter from the Post editorial board, the report, or our previous Conduit Street post, Report Puts Pension Funding Gap In New Light

Report Puts Pension Funding Gap In New Light

June 28, 2013

As reported in the Washington Post, state pensions face a much larger funding gap than their financial reports typically reveal, according to a new calculation released Thursday by the credit rating firm Moody’s Investors Service.  As described,

In its report, Moody’s used a corporate bond rate to project the future value of pension fund assets. Many states are using rates that make their pension systems look much healthier than they are, thus allowing governments to contribute less to the plans each year, critics of such practices say.

Moody’s said its methodology is a more accurate way of measuring the financial burden posed by public-employee pensions. It also compared the size of each state’s pension liabilities with what that state could muster in funds.

In that area, Maryland had pension liabilities totaling 99.5 percent of revenues, according to Moody’s.  The report relies on governmental revenues as reported in each state’s consolidated annual financial report, which include federal funds.

For more information see the full story from the Post, Moody’s Report, and our past coverage on Conduit Street, The Financial Health of the Maryland State Pension System.

Pension Board Lowers Investment Target

June 21, 2013

As described in the Maryland Reporter, the Maryland State Retirement and Pension System Board of Trustees recently lowered its investment target for the state pension fund, which is currently valued around $41 billion.  The Board lowered the investment target from 7.75% to 7.55%, a move it’s been considering for over a year, according to the Maryland Reporter.

The rate of return on investment is a key target that helps determine how much the state must put away to fund the retirement of over 300,000 active and retired state employees and public school teachers. Next year the state government is expected to contribute $1.9 billion into the pension fund, with the counties helping carry some of the load on teacher pensions. That’s up $200 million from this year’s annual contribution to the pension fund.

The change will be phased-in over the next four years, as recommended by Maryland’s Secretary of Budget and Management, Eloise Foster, according to the Maryland Reporter.

For more information, see the full story from the Maryland Reporter.


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