Harford County Executive and MACo Past President David Craig sent a letter to the Harford County Delegation earlier this week detailing the county’s opposition to the proposed teacher pension shift.
As you are keenly aware, the Governor’s budget proposes a dramatic shift of teacher pension costs onto county governments for the coming fiscal year. For Harford County taxpayers, the burden of this new expense is $8-10 million. To give you a sense of the magnitude of this new expense, consider that Harford County currently pays $7,605,312 for the pensions of its civilian employees. (I have excluded law enforcement/corrections pensions because their plan design is so drastically different.) This new obligation would more than double that amount.
Even if one assumes that the offsets provided in the Governor’s proposal are real, Harford County would still have to come up with an additional $1.3 million next year to fund teacher pensions. And at the State’s own admission, these offsets will become less substantial or reliable in out years. This of course also assumes that the proposed offsets survive the legislative budget process and are not eroded to balance the state budget.
The Governor frequently reminds us that there are three cost drivers affecting our pensions: pension benefits, salary increases, and investment returns. None of these three things, however, are controlled by county governments in any way. Furthermore, the Governor’s argument that pensions should be shifted to counties because the state does not determine pension costs makes no sense, because county governments do not make teacher salary or pension decisions either — local school boards do. County governments are now being asked to pay for something that they had no role in negotiating.
There are structural and governance issues with the state pension system that must be addressed if we are serious about our desire to rein in the pension problem. If decisions are to be made based on fiscal prudence and affordability, we should look to an independent board of experts to govern the plan, exclusively set the plan design and establish its investment policy.
To that point, we must consider re-constituting the Board of Trustees of the Maryland State Retirement and Pension System. While the current trustees are all well-intentioned leaders, most are not experts in pensions, actuarial science, or finance. Of the 14 trustees, 9 are selected exclusively based on their position or membership within a group of employees covered by the pension system. This presents two problems.
First, that means a minority of the board is selected for having relevant expertise. This may, in part, explain why the board has tolerated its investment managers’ poor performance in both good and bad economies. While it is appropriate that our public employees have advocates on the board, they are not well served by having employee representatives with little to no financial background controlling roughly 2/3 of the board.
Second, it means that 9 out of the 14 trustees have a financial stake in the pension system. Best practices require that a majority of a plan’s trustees be independent of that retirement system and all its participating employers.
If and when a new independent board of experts is established, they must undergo a comprehensive review of their investment policies and management. While it is impossible to invest our way out of this problem, we cannot continue to settle for dismal investment returns. Poor investment returns are only digging the hole deeper. New investment managers should be hired based one metric: their ability to outperform their peer investment managers. Until this part of the problem is addressed, I feel that it is irresponsible for the state to pass any portion of pension costs to the counties.
In conclusion, the state caused this problem, and instead of fixing it, they are sending the bill to the counties to pay. Harford County is now being asked to pay for a system that we played no part in breaking, and over which we still have no control.
Harford County taxpayers simply cannot afford this new expense to be added on top of the already established maintenance of effort (MOE). The non-education parts of our budget are being detrimentally impacted by the requirement to fund every penny of the school formulas and our MOE target. Presently, the Board of Education accounts for 45% of Harford County’s operating budget. If Harford County is expected to add an additional $8-10 million on top of existing spending, we will be forced to either eliminate certain non-education services (i.e. lay off), or raise taxes.
On this issue, we are not drawing a line in the sand; we are drawing a line in the concrete. We stand united with county governments from around the state, as well as with the education community and public employee unions in saying we will not accept any shift of teacher pensions from the state to counties. I ask that you stand with us and fight the Governor’s proposal.
David R. Craig
Harford County Executive