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.

Baltimore Considers Employee Pension Contributions

May 22, 2013
Mayor_Stephanie_Rawlings-Blake_Courtesy of the Office of Mayor Stephanie Rawlings-Blake

Courtesy of the Office of Mayor Stephanie Rawlings-Blake

As reported in the Baltimore Sun, the Baltimore City Council’s finance committee is scheduled to hear testimony Thursday on a proposal by Mayor Stephanie Rawlings-Blake to require thousands of civilian employees to begin making contributions. As described,

The proposal would require non-public-safety workers to contribute 1 percent of their salaries to the pension fund next fiscal year. The contributions would increase each year for five years until workers were contributing 5 percent. . . To help compensate for the changes, Rawlings-Blake is proposing a raise for employees of 2 percent a year for five years.

The Baltimore City Employee Retirement System is facing a $700million in unfunded liabilities, according to the Sun.  As reported,

Officials said the pension change and pay increase would cost the city about $180,000 next fiscal year but begin saving money after that: $2.1 million in 2015, $4.4 million in 2016, $6.5 million in 2017, and $8.5 million in 2018.

The savings would help the city fund property tax cuts of 22 percent over the next decade, said Ryan O’Doherty, the mayor’s spokesman.

For more information, see the full story from the Sun.  

Sharing Risk: Adjustable Pension Plans

May 16, 2013

An editorial in Governing discusses a new compromise between defined-benefit and defined-contribution pension plans that could help avert local pension fund shortfalls.  In simplest terms, conventional “defined-benefit” plans place risk on employers who must pay set benefits despite investment returns, while defined-contribution plans effectively shift that uncertainty onto the employees.  As described by the author, the adjustable pension plan divides the risk,

Adjustable pension plans (APPs) guarantee lifetime payments to employees. But unlike traditional defined-benefit systems, the size of the benefit would be adjusted based on the pension fund’s investment performance during the previous year. For employees, it means that while payments would often be less than under traditional defined-benefit plans, they would be secure.

According to the article, Maine is the first state to consider the approach, though other private-sector employers have adopted adjustable pension plans.

For more information, including a description of adjustable pension plans, see the complete article in Governing.

Baltimore Mayor Seeks to Close Pension Deficit

April 30, 2013

As reported by WBAL, Mayor Stephanie Rawlings-Blake on Monday introduced two bills dealing with city workers’ pensions and cost-of-living increases for firefighters and police.  The Mayor said the bills would help close the $700 million deficit in the city’s ability to fully fund retirement plans, as reported.

The mayor introduced a bill that would make non-public safety workers pay 1 percent of their salaries into the pension system per year for the next five years so that by 2017, workers would contribute 5 percent of their salary into their pension fund.

It’s a proposal she first came up with in her State of the City address.  “Baltimore’s pension system for civilian workers is the only large system in Maryland that doesn’t require any employee contribution. That must change,” she said at the time.

For more information, read the fully story from WBAL.

NACo Urges County Pension Flexibility

April 25, 2013

In a letter to the House Ways and Means Committee Working Group on Retirement and Pensions this week, NACo urged the group to ensure any federal tax changes support retirement policies and flexibility at the state and local level.

NACo’s letter describes how the current tax treatment of state and local pensions has supported a robust, cost efficient, and sustainable retirement benefit system, even through recent economic downturns, and asks that the pensions be left untouched by tax reforms.

As you consider possible reforms of the federal tax code, we urge you to “do no harm” to this current system of support for employer-provided retirement plans. Care must be taken so that the tax treatment of retirement savings continues to support real retirement security for American workers, both public-sector as well as private-sector, and maintain the quality of life for future generations of retirees.

According to NACo, the Working Group on Retirement and Pensions is one of several formed to review current tax law in specified areas and seek input from subject matter experts and the general public.  The Joint Committee on Taxation has been instructed to summarize the comments and deliberations of each working group in a report due to the full Ways and Means Committee by May 6, 2013.

For more information, read the letter or contact Deseree L. Gardner​ of NACo at 202.942.4204.


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