DLS Recommends Teacher Pension Shift

The General Assembly’s staff agency, the Department of Legislative Services (DLS), has recommended that the State shift costs for teacher pensions to local employers. The full 49 page analysis is available online, but we will summarize the main issues here.

The DLS recommendation comes in this form, from page 36 of the analysis:

Recommended Actions

3. Add the following language to the general fund appropriation:

, provided that $233,000,000 of this appropriation shall be reduced contingent upon the enactment of legislation shifting a portion of teachers’ retirement costs to the counties and county boards of education, and funding the fiscal 2012 local share of teachers’ retirement with $124,420,746 in State funds made available from federal Education Jobs Funds received in fiscal 2011.

Explanation: The State pays 100% of the employers’ share of retirement costs for teachers, and this has been one of the fastest growing items in the State budget over the last five years, totaling $900 million in fiscal 2011. A commission to study all aspects of State-funded benefits and pensions recommended that combined pension and Social Security costs for teachers be shared so that the State pays 50% of the costs and the local boards of education support the remaining 50%. This action implements the 50-50 cost share of teachers’ retirement in fiscal 2012 contingent on a provision in the Budget Reconciliation and Financing Act (BRFA) of 2011.

A related provision to be proposed for the BRFA of 2011 would apply $124.4 million in savings from the federal Education Jobs Fund that was granted in fiscal 2011 toward the local share of teachers’ retirement for fiscal 2012.

Consideration of this recommendation will likely come as the House Appropriations Committee holds its “full committee” decision meetings, likely in early March. The cost shift would require statutory changes, thus the somewhat complicated suggestion to reduce funding in the Governor’s budget contingent upon passage of implementing elements within the BRFA.

This recommendation is similar, but not identical, to a proposal passed by the Maryland Senate last year, and another proposal issued by the Benefits Sustainability Commission late last year. All three essentially seek to effect a “50/50 split” of total retirement costs (including both pension and social security) for employees in the teacher systems. This DLS proposal would use the $124 million in one-year federal funds received by Maryland as part of the Education Jobs bill as a means to effect a two-year phase-in of this substantial cost shift.

The effect of the proposed cost shift for FY 2012 is shown on page 46 of the analysis. The components of that chart are explained below:

Wealth Equalization: Since DLS is recommending that the General Assembly consider a “wealth equalizing” approach to this cost shift, the main recommendation requires shifting $433 million in costs to local employers = twice the amount that is required to effect the desired 50/50 total cost split. That amount is shown in the second column of all negative numbers for each jurisdiction. The “wealth equalization” is effected by increasing the foundation formula for education, in an amount required to restore roughly half of that $466 cut — these figures are shown in the first column. The net of these two actions would by itself be a total of roughly $233 million in cost shifts.

Federal Funds Offset: DLS is recommending that for FY 2012 only, federal funds be used to “offset” the required payment by local employers — this amount is shown in the third column, totaling $124 million. The fourth column, then, represents the total effect on each county’s school board taking each factor into consideration for FY 2012. The differential treatment of jurisdictions in each component of the shifts and offsets yield a widely differing range of local impacts — as Baltimore City schools would actually receive a substantial $6.6 million funding increase, while the State’s largest school district in Montgomery County would bear more than $41 million in first year new costs.

Alternative Without Wealth Equalization: DLS also shows the net effect of all components if the process of wealth equalization is removed from the proposed shift. The individual components are not shown, but the net effect on each county’s schools is shown in the fifth column on the same page.

The longer term effects (only using current contribution rates, not higher ones expected for FY 2013 and beyond) are shown on page 45 of the analysis. Without the one-time offset of federal funds, the full $233 million in costs would be shifted. Assuming employer contribution rates increase in FY 2013 by approximately 1% (a rough approximation of the recent trend) this fiscal estimate would be likely to increase by roughly $30 million for next year — meaning the new local cost would likely be roughly $260-265 million.

Michael Sanderson

Executive Director Maryland Association of Counties

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