The Public Employees’ and Retirees’ Benefit Sustainability Commission met today to vote on numerous proposals to address the unfunded liabilities associated with the State’s pension and health benefit systems.  In his opening comments, Commission Chair and Former Speaker of the House of Delegates Casper Taylor, Jr., stated that it is unlikely that all the work will be completed during the 2011 General Assembly Session and that the Commission will extend its deadline to October 1, 2011, reassess following the Session, and put together a final package for the 2012 General Assembly Session.

Teacher Pension Shift

With respect to teacher pensions, the Commission voted to shift some of the costs to local boards of education, to phase the cost shift in over a minimum of 3 years instead of implementing it immediately in fiscal 2012, and add “a wealth equalization” component to alter the effects across jurisdictions. The Commission endorsed a plan to pursue a “50/50 split” of total retirement costs between the state and local employers, when including the costs of social security payments already borne by the local boards.

The fiscal effects of this proposal were detailed in the Commission’s “Decision Document” from its December 13 meeting, available online here. The total amount (based on FY 2012 funding data) of the proposed shift is estimated by staff at approximately $250 million, but with pension contribution rates expected to rise, the full effect is likely to be incrementally even greater in coming years.

All these recommendations (and many others from the Commission’s report) will require legislative approval to take effect. The Commission’s report will be delivered to the General Assembly in time for consideration during its upcoming session.

Additional language was distributed by staff for consideration that would have expanded the Board of Trustees for the State Retirement and Pension System to include a local board of education member, but the language failed due to lack of a motion.

Other Benefit and Pension Proposals

The Commission also voted on changes to employee and retiree health insurance and employee pensions.  With respect to employee health benefits, the Commission voted to reduce costs by 10% by aligning Maryland’s benefits with peer states and requiring the State to continually examine costs to keep aligned with peers while considering the total compensation necessary to recruit and retain staff.  The Commission voted to achieve the savings through changes to the State premium subsidy and plan design elements, but with placing limits or out-of-pocket caps for employees earning less than $40,000.

The Commission voted to continue providing retirees with access to the State health plan and a blended premium, but with a contingency plan to restrict access only to Medicare-eligible retirees if liability growth exceeds a specified level.  Additional language was adopted, however it was not made available.  Other changes adopted include: providing the maximum premium subsidy for the retiree, but allowing for a lower subsidy for the retiree’s spouse and dependents; increasing the eligibility requirement for retiree participation in the State health plan from 5 to 15 years; increasing the years of active service required to earn the maximum premium subsidy from 16 to 25 years; restricting eligibility for participation in the State health plan to those employees who retire directly from the State for future deferred vested individuals; and requiring all Medicare-eligible retirees to join Medicare Part D for all prescription drug benefits by 2020 with a State contingency plan to provide supplemental coverage through an Employer Group Waiver Plan or similar mechanism.  The Commission considered whether the State should require that only service credit earned through employment with the State count towards eligibility for retiree participation in the State health plan, but opted for further study of this issue.

Broader pension changes voted on by the Commission include:  redesigning pension benefits for new and current employees who are not eligible for retirement through a combination of options to include a hybrid/cash balance plan and defined benefit plan with reduced benefits going forward; making cost-of-living-adjustments for future retirees  contingent on investment returns meeting or exceeding the actuarial target currently set at 7.75%; achieving the Commission’s goal of 80% funding of the system in 10 years by reserving savings from benefit redesign to pay down the unfunded liability up to a certain level; changing vesting from 5 to 10 years and adopting a rule of 92 for retirement eligibility; and modifying the DROP benefit of the public safety plans.

The Commission also adopted a recommendation to have the Joint Committee on Pensions and the General Assembly Compensation Commission to study the Judges’ and Legislative Pension Systems, respectively.