March 6, 2013
This week, MACo received a letter from Maryland’s State Treasurer Nancy Kopp sharing that the Maryland State Pension Board of Trustees found no objections to legislation that would provide a voice for county interests in the Board’s deliberations. The legislation, HB390/SB741 would add one member to the Pension Board of Trustees to reflect the new role in fiscal support for the Teachers Retirement and Pension System.
The Pension Board of Trustees considered the legislation as part of their review of all pension-related legislation in the 2013 session. The Treasurer’s letter conveys the Board’s understanding of the reasons behind the bill and did not have any objections. As described by the Treasurer,
As with all proposed legislation concerning the System, the Board gave very careful consideration of the bill, and decided that it set forth a matter of policy that is most appropriately placed before the System’s plan sponsor, the General Assembly. . . Please know that the Board of Trustees understands the basis for HB390/SB741 given the actions taken last year to require Maryland subdivisions to begin paying the normal costs associated with public school teacher pensions.
For more information, see the complete letter from the Treasurer and our previous related posts on the pension board legislation: MACo Urges “Seat At The Table” on Pension Board, MACo Presents Pension Initiative in House
February 28, 2013
Following the public hearings on HB 390 and SB 741, MACo has released a followup letter to the members of the two committees that have heard the proposed bill. The effort to gain county representation on the pension board is among MACo’s legislative initiatives for the 2013 session.
From MACo’s February 26 letter:
An undertone of comments on SB 741 has been that the proposed county government seat would “dilute” current representatives of other stakeholder groups. MACo believes this argument misses the essential function of the current Board. The Board’s essential role is to offer fiduciary and oversight guidance to the system, its procedures, and its investments. The Board is not charged with matters of benefit structures, or other sorts of decisions that might inherently lead toward deep conflict or split voting among the various stakeholders.
The constitution of Maryland’s Board wisely seeks to represent stakeholders, each of whom bring important expertise and perspective to its deliberations. The seat proposed by SB 741 would enhance these assets, by adding an individual with substantial government budget experience.
Read the full letter online.
Read MACo’s testimony on HB 390.
February 22, 2013
HB 1414 would ask the State Retirement and Pension System to evaluate various provisions that would accompany a county decision to alter the pension offerings to the teachers in its school system.
During the 2012 legislative session, the widely-debated teacher pension shift placed a substantial new funding responsibility onto county governments, to support the normal costs of pensions for teachers in the county’s public schools. This cost is applied as an add-on above the state-mandated maintenance of effort funding levels, and is effectively a new cost burden on county governments. Currently, all teachers across the state are part of the statewide teachers pension system run by the state.
HB 1414 would ask for an evaluation of some potentially difficult transitions that might arise if counties were granted authority to change this pension offering. Among the charges in the bill are to study the accounting for unfunded liabilities attributable to the employees affected, portability for employees who would change plans, and other considerations that would arise from different replacement plan options such as a defined contribution offering.
HB 1414 has been assigned to the House Rules Committee, and has not yet been scheduled for a public hearing.
Read the full bill online at the Maryland General Assembly website.
February 21, 2013
As reported earlier on Conduit Street, the Maryland State Retirement and Pension System Board of Trustees recommended legislation to remove a deduction for administrative fees charged to some employers in the pension system. The Special Joint Committee on Pensions introduced the proposal as SB 475, which would have resulted in additional actual costs for county governments who participate in the Maryland Employees’ Retirement and Pension Plans.
MACo had raised concerns with the bill, and especially with a systemic reliance on administrative fees to support the State Retirement Agency’s budget. Administrative fees were instituted during the great recession, and were driven by the State’s budgetary needs. As described in MACo’s testimony:
The administrative charge began in FY12 for schools, and in FY13 for the participating government units, which includes employees of 12 county governments. . . MACo believes that the entire charge-back mechanism, originally driven by difficult budget times, should be a priority for elimination as the fiscal situation improves.
MACo had been joined by MML and the Maryland Association of Board of Education, sharing similar concerns.
The total annual fees for the twelve county participating governmental units are estimated by the State Retirement and Pension System to be over $1 million annually, and rising each year by approximately 3%. Withdrawal of the legislation means that county participating governmental units may continue to deduct administrative fees from their employer contributions in future years, resulting in no change in the effective program cost.
MACo had previously covered this proposal as it was revealed as possible legislation prior to the session: Locals In State Pension System May Face New Costs
February 20, 2013
MACo staff testified today in support of a bill that would add one county member to the State Retirement and Pension System Board of Trustees. House Bill 390, State Retirement and Pension System – Board of Trustees, was sponsored by Delegate Melony Griffith, Chair of the House Oversight Committee on Pensions and co-chair of the Special Joint Committee on Pensions. Delegate Mary-Dulany James, who oversaw the last change in membership of the Board of Trustees in 2003, is co-sponsor.
Delegate Griffith introduced the legislation at the hearing, sharing how MACo approached her in the interim to discuss the idea for the bill, and describing the bill’s elements, including the selection process for the new trustee. Delegate James noted how the representative of county government would have substantial background in financial management and oversight of county budgets. And, Delegate Bohanan distinguished the county member from another participating governmental unit representative, pointing to the necessity of adding a member in order to preserve a seat for counties on the Board.
The legislation reflects the recent expansion of county governments’ financial responsibility for the pension system, with last year’s teacher pension shift. MACo is pursuing membership on the Board of Trustees to have a voice in the Board’s oversight and administration of the pension fund. As counties assume over a quarter billion dollars in pension costs, a county member on the Board of Trustees will provide a seat at the table for discussions affecting the financial health of the Retirement and Pension System.
During the hearing, three groups representing organized labor opposed the bill, citing concerns that the county representation could “dilute” their current representation (already in law). Several Committee members asked about the specifics of this concern, noting the current law’s representation for the broader universe of participating governmental units does not necessarily result in a county government view.
The Senate crossfiled bill, SB 741, is slated for its hearing Thursday morning.
January 31, 2013
In a news conference this week, House Republicans announced a package of pension legislation to “revamp” the system and put it on “better footing.” As reported by the Baltimore Sun (limited free views available):
One bill, sponsored by Howard County Del. Gail H. Bates, would require the state pension board to change its assumed rate of return from its current 7.75 percent to 6 percent. Such a move would, at least in the short term, force some hard choices on the state: either increasing its yearly contribution to the system, requiring employees to contribute more or cutting benefits.
Another bill. sponsored by Anne Arundel County Del. Nicholaus R. Kipke, would limit to 10 percent the amount of the plan’s assets that can be put into so-called “alternative investments” such as hedge funds and venture capital. The system now has more than 20 percent invested in such instruments.
A measure proposed by Haddaway-Riccio would add two local government representatives to the pension board to reflect last year’s shift of part of the burden of teacher pensions to Baltimore City and the counties.
Republicans members formed a workgroup during the interim to formulate proposals.
January 25, 2013
On January 23, the Executive Director and Chief Investment Officer of the State Retirement Agency briefed the Senate Budget and Taxation Committee. The Executive Director presented a summary of the most recent actuarial valuation, cost-sharing of the Teacher Pensions, and Governmental Accounting Standards Board No. 67 and 68, and Maryland’s recent pension reforms. The Chief Investment Officer discussed the system’s investment returns over the past 25 years, and shared data on the fund’s asset allocations.
The complete presentation of the Agency is available here.
January 22, 2013
State Treasurer Nancy Kopp wrote an article on the rate of return for the State Retirement Agency’s January issue of Retiree News and Notes. The article, “Assumed rate of return: the real story,” describes how the Maryland State Retirement and Pension System assumed rate of return, currently set for 7.75% is set each year by the Pension Board of Trustees based on a long-term prediction of what the system expects to earn. According to the State Treasurer,
As a real measure, the system has done very well in meeting or exceeding its assumed rate of 7.75% over the long term. The system has earned 7.85% on average over the past 25 years as of June 30, 2012.
The recent State Retirement & Pension System Funding Study 2012 included estimates of lowering the assumed rate of return from 7.75% to 7.55% by 2016. For more discussion of rates of return, see the Treasurer’s full article.
Past related posts:
Modernizing Public Pension Myths
The Financial Health of the Maryland State Pension System
January 9, 2013
Governing magazine recently published an article analyzing several commonly-held public pension practices, including topics of debate for Maryland’s public pension system.
One topic is the assumed rate of return. The recent State Retirement & Pension System Funding Study 2012 included estimates of lowering the assumed rate of return from 7.75% to 7.55% by 2016 (five basis points over a four year period). Governing suggests a reduction closer to 7% stating,
For funding policy, it seems to me that the most realistic path for the assumed rate of investment returns is a nationwide average closer to 7 percent until the global economy clears its debt hangover in this “New Normal” market environment. Even that adjustment in discount rates would have profound implications for how we value pension liabilities and the annual costs to be borne by employers and employees.
Another subject that Governing addresses is the level of funding that should be considered healthy for a public pension fund. In the 2011 Comprehensive Annual Financial Report of the Maryland State Retirement & Pension System, the State sets out markers for reaching 80% and 100% funding for the System. As a result of comprehensive legislative reform of the pension system in 2011, the introductory message describes,
the General Assembly’s actuary projects that the system will reach approximately 80% funding by fiscal year 2023—three years faster than pre-reform projections—and full funding in fiscal year 2031.
Governing would push these goals even further. Seeking to debunk the idea that a 70% or 80% funding level is OK, Governing sets forth that
. . .a fully funded pension plan must today have market-value assets of 125 percent of current accrued actuarial liabilities near the peak of an average business cycle — in order to offset the near-certain loss of stock market values in the following recession.
In Maryland, administrative and policy decisions like the investment rate of return and funding goals are the province of the Board of Trustees of the Maryland State Retirement & Pension System. In the wake of recent legislation shifting direct costs for teacher pensions to county governments, MACo has adopted an initiative for the 2013 session to secure county membership on the Board of Trustees, to provide insight and guidance on the full range of administrative and oversight matters before the Board.
For more information on the subject of Maryland’s State Retirement & Pension System investing, see our related post, Maryland State Pension System: Investment Strategy and Management
December 14, 2012
Yesterday the Joint Pension Committee adopted six legislative proposals for the upcoming session, including legislation that would phase out the corridor funding method in the Teachers’ and Employees’ systems over the next ten years. Under the proposal, which is based on a joint recommendation by the State Retirement Agency and the Department of Legislative Services, the “Board of Trustees will set contribution rates that amortize unfunded liabilities over 25 years.” Currently, the amortization period differ. According to the Department of Legislative Services’ State Retirement and Pension System Funding Study 2012,
The pre-July portion [of the unfunded liabilities] is being amortized over a 20-year closed period. The liabilities for all subsequent years are amortized on separate 25-year closed periods…The proposal suggested a switch to a new, unifed 25-year closed amortization base for all past liability sets, essentially beginning the financing of past obligations anew. The savings associated with a change in the amortization make it possible to phase-out corridor method while also reducing the employer contribution to a more manageable amount.
The corridor funding method has aggravated the investment losses of recent years and contributed to underfunding of the System. As described, “[r]unning these large losses through the corridor rate calculations only exacerbates system underfunding. . .”