Shifting Teachers’ Pension Costs to Counties-The Wrong Problem and the Wrong Cure

Caroline County is amongst the growing list of Maryland county governments in strong opposition to the Governor’s proposed teacher pension shift.  Caroline County Attorney Ernest Crofoot  recently penned a letter stating that the shift to counties is the wrong problem and the wrong cure.

 

Much was said during and after the 2010 & 2011 State legislative sessions regarding teachers/school system pension costs and shifting some (or all) of such costs “to the locals,” meaning the 24 local subdivisions in Maryland. Bold (but factually incorrect) statements have been made by State legislators leading to bold (and also factually incorrect) editorials in major and minor newspapers and other media throughout the State. The general public needs to understand better the scheme of public education in Maryland and its financing structure, particularly as to salaries and pensions.

In the fall of 2010 at a meeting of the Public Employees’ and Retirees’ Benefit Sustainability Commission (the “Commission”) the following comment was made: “Can you imagine someone else determining salaries and you have to pay for it?” The remark echoed comments made during the 2010 and 2011 legislative sessions the State was a victim of factors beyond the State’s control as to what goes in-to the teachers’ pension system “problem.”

Let’s set the record straight. “Local boards of education are State agencies. They are created by State law, and operate under the Education Article of the State Code. Salaries are not determined by county governments. Teachers and employees are given collective bargaining rights under the Education Article and bargain only with the local boards of education. These negotiations cover not only salaries but all of the working conditions for school system employees, including administrative personnel, support staff, cafeteria workers, etc. Over the years the State itself has pumped billions of dollars into school systems to attract teachers, but now blames the counties for the higher salaries which, in turn, increase the pension fund liabilities. Your county does not have a seat at the bargaining table!

Similarly, the counties do not in any way determine the amount of pension benefits payable to any retiree of the pension systems. The State Legislature controls the determination of what constitutes a full or normal retirement, e.g., number of years of creditable service, as well as the multiplier applied to those years. Thus, not a single one of the factors determining the timing or amount of pension for a school system employee is under the control of any county in the State of Maryland.

In a similar vein, at that same Commission meeting, it was stated: “Maryland is the only state to give up income tax to counties. We have a high tax rate because of the piggy back tax.”  Let’s be fair about it. The piggy back tax was not enacted in a vacuum. It was a major piece of a major tax restructuring at the State and local levels. It moves hand in glove with State taxable income. Locals gave up a lot in the piggy back tax structure. Moreover, the statement is patently incorrect. A number of states require or allow a local income tax at a county or city level in addition to the property tax.

If the Legislature wants to shift the burden it claims it cannot afford to the counties, it should just say so, and not hide behind sound bytes to enhance its political posture. Say that the State budget is in too bad a shape to carry on the system that the State created, and instead of fixing the problem the State Legislature created, the State is going to mandate that the locals fix it, thus shifting blame for any necessary attendant tax increase on the counties, just as was done when: (1) the State took 95% of the locals’ highway user revenues and then told citizens that the deteriorating roads were a local, not a State, problem, and (2) the State “borrowed” $367,000,000 from the local income tax reserve fund (you local dollars!) and is requiring the local subdivisions to pay it back over a 10 year period by reducing local income tax distributions.

As with any crises (real or perceived) there is the “get this problem off my table” reaction and the more reasonable, factual background. A large part of the problem surrounding the health of the State’s pension system is the bad economy. Investment return was off for several years, and pension funds, 401(k)s, 457(b)s, IRAs, etc. all felt the pinch. (Note: State pension funds had record earnings in the most recent period indicating that the pension problem may be shrinking.) Size makes the State’s problems look gargantuan. A few years ago, when the economy was booming, all the fund managers beat their chests and proclaimed what a great job they were doing. Pension funds were healthy and benefits were increased. Now that we are still in the “Great Recession,” a scapegoat is necessary in the world of politics.

The State has undertaken some obvious changes in its pension plan structures that will alleviate to some degree the unfunded liabilities of the pension plans over time. In addition to those changes, actuarial assumptions should be constantly reviewed and changed where facts warrant.

There are many other reasonable changes to pension systems that could enhance pension system health over the long term. But, at least, let’s be honest about the cause and reasonable about the solutions. There is no quick fix. Shifting the contribution liability fixes nothing in the long run; it merely changes the politics of the matter and places the “blame” where it should not be placed.

I note that according to a jointly sponsored study by the non-partisan National Governor’s Association and the National Association of State Budget Officers, Maryland’s General Fund spending will increase by $1.4 BILLION – 11% – in FY 2012, the fourth largest of any state. Over the last several years we, the local jurisdictions, have cut our general fund/operating spending through the bone and to the marrow, have already had funds taken by the State, and have been given the burden of paying 90% of the costs of running property tax assessment offices and its computer upgrades.

Finally, one honest State Senator in the 2011 budget hearings told a panel from the teachers’ union that “the State made a promise that the State can’t keep.” He might have added “unless we force someone else to take on our obligation.”

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