Governor’s Budget Repeats Cut in Pension Funding

The proposed FY 2015 budget has stirred controversy by permanently dropping the amount of pension savings to be reinvested into the system to advance it toward an adequate funding status. This $100 million change per year, part of the plan to address the general fund’s structural deficit, may have direct cost consequences for counties that participate in the state pension system, and may add pressure to the system into which all counties now make substantial payments to offset teacher pensions.

The General Assembly has made several reforms in the past few years to address growing unfunded liabilities of the pension system.  These changes have included reducing costs by downgrading member benefits, shifting teacher pension system costs to county governments, and increasing funding by setting aside additional money in the State budget to pay down the System’s liabilities.

Last year, however, the additional money set aside to pay down the System’s unfunded liabilities was reduced from $300 million to $200 million.  The $100 million difference was held back in case the State needed to provide support for any programs but by sequestration.  Now for FY 2015 (and beyond), the Governor has pulled back $100 million from the monies intended to pay down the pension liabilities again to support the general fund. As described by the Reporter,

When cuts to benefits and increases in employee contributions were passed in 2011, the state agreed to put an additional $300 million a year into the state pension system. That was cut to $200 million this year and now also in the proposed budget, allowing $172 million in “spending reductions” to be used for other programs.

According to testimony of the Executive Director of the State Retirement and Pension Agency in the Senate’s Budget & Taxation Committee yesterday, Maryland is one of the only, if not the only state in the union that has a provision in law requiring reinvestment of earnings to pay down the unfunded liability of its pension fund.  The Director noted, however, that the Governor of Massachusetts is putting additional money towards the state pension system this year.  The current net pension liability of the Maryland State Retirement and Pension System is $18.8 billion.

For more information, see Analysis: Putting a different spin on $39 billion state budget, and Unions, pension board unhappy O’Malley cut $100M in promised payment to retirement fund from the Maryland Reporter and Governor’s Budget: No New County Reductions, Limited New Funding, State Budget Provides $100m Hedge Via Pension Funding, Advisor Disappointed in Potential Pension Funding Cut, Senate Pension Funding Plan – Long Term Fix, Short Term Cut, and Pensions Committee Discusses Rates, Rules, and Recommendations from Conduit Street. To listen to the recent briefing from the Senate Budget & Taxation Committee, click here.

(editing note – a previous version of this article stated that the Director of the State Retirement Agency recommended reducing the annual reinvestment amount to $200 million; this is incorrect.  In fact, the State Retirement Agency recommended maintaining the $300 million commitment. A corrected version of the article is above.)

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