The Maryland State Pension System is made up of nine retirement plans, and local governments participate in six of those plans. As of July 1, 2014, 126 units of local government participate in the State Pension plans, including eleven county governments. The county government role as participant in these plans, and its new role as payer of teacher pension costs translate to a significant overall county stake in the Maryland State Pension System.
Participating Governmental Units
County participation in the State Pension System creates an interest in the System’s overall financial health. For several years, and especially following the 2009 recession, there has been concern that the System was not adequately funded. In 2011, the Board of Trustees reported a goal to reach approximately 80% funding by fiscal year 2023. The current funding level was well below that ratio, as reported,
At June 30, 2011, the System’s actuarial accrued liability was $55.9 billion and the unfunded actuarial accrued liability totaled $19.7 billion, resulting in a funded status ratio of 64.7%.
The System continues to struggle with low investment returns and a modest increases in the funded ratio. The 2015 Comprehensive Annual Financial Report (CAFR) for the State Pension System states,
The System’s funded ratio increased from 68.67 percent at June 30, 2014 to 69.66 percent at June 30, 2015. At June 30, 2015, the System’s actuarial accrued liability was $66.2 billion and the unfunded actuarial accrued liability totaled $20.1 billion, resulting in a funded status ratio of 69.6 percent
Teacher Pension Shift
The costs of maintaining the Maryland State Pension System, especially through the recent recession, have created a strain on the state budget. In the final hours of a special session, the General Assembly passed the Budget Reconciliation and Financing Act (BRFA) of 2012. Among many provisions in the $35.5 billion budget plan, the BRFA 2012 shifted the cost of teacher retirement and pension plans to county governments.
According to the BRFA, the cost shift will be phased-in initially, over four years, beginning in FY 2013. Pension costs for each local school board differ based on the number of employees in the teachers’ system, other participants in the teacher pension such as library and community colleges employees are still funded by the state. Local school boards will pay a total of $136.6 million in state fiscal year 2013.
County governments must pay a specified dollar amount towards local school boards to account for their increased pension costs. While the school boards are nominally making the direct payments to the state, the BRFA bill directs each county to make a required appropriation to its schools in an amount calculated to offset the new shared costs. In the last year of the phase-in, fiscal year 2016, the total county contributions were $216.5 million.
After FY 2016, the counties include this fixed amount of pension costs every year within their education budget, as part of maintenance of effort. This means that if teacher pension normal costs fall, local school boards may see a windfall. If they rise, local school boards will need to direct additional funds towards this purpose. In FY 2017, teacher pension costs will increase by an estimated $30 million.
County teacher pension costs are also unaffected by investment returns of the State Pension System. While the teacher pension shift may have been driven in part by budget pressure resulting from low investments returns during the recession, under current law, the amount of each county’s teacher pension payment does not fluctuate with investment returns or actual teacher pension costs.