State Policy Changes Boost Teacher Pension Costs

According to a budget analysis prepared by the Department of Legislative Services, “local governments should continue to plan for a higher-than-forecast normal cost rate in fiscal 2017.”  This increase in normal costs is due to a change in demographic assumptions used to calculate pension liabilities. It is estimated that local school board contributions will increase by a projected $73.3 million beginning in fiscal 2017.

The budget analysis explains the effect of these changes in actuarial assumptions:

The board of trustees voted in spring 2012 to adopt the recommendations of its actuary to change a variety of demographic assumptions used to calculate pension liabilities. The new assumptions related to rates of retirement, disability, withdrawal, and mortality were first applied to the June 30, 2012 actuarial valuation, which is the basis for the calculation of employer contribution rates for fiscal 2014. The changes vary extensively across different plans within SRPS, as well as by age and accumulated service credit, reflecting actual trends in those rates identified by an experience study completed in 2011. The net effect, however, was an increase in the value of service credit earned by SRPS members. This is reflected in an increase in the normal cost, which is the value of pension benefits earned in a given year by members.

The analysis further details how these costs are borne directly by school boards, but with a required appropriation (with annual dollar amounts written directly into the enacting bill) from county governments as an offset.

Chapter 1 of the first Special Session of 2012 requires local school boards to pay a portion of the normal cost for their employees who are members of TRS/TPS. Prior to that, the State paid 100% of the annual employer contribution on behalf of teachers in the State. Based on 2012 projections of the normal cost, local school boards pay 50% of the normal cost in fiscal 2013, phasing up to 100% of the normal cost by fiscal 2016. For those four years, Chapter 1 specifies the exact dollar amount to be paid by each local school board based on the projected normal cost and the local share of that cost. Beginning in fiscal 2017, however, local school boards must pay 100% of the actual normal cost. It bears noting that beginning in fiscal 2013, Chapter 1 also requires county governments and Baltimore City to adjust their maintenance of effort payments to local school boards to compensate them for teacher pension costs. Beginning in fiscal 2017, the fiscal 2016 payments by the counties are included in subsequent years’ maintenance of effort calculations, so local school boards are responsible for any increase in normal cost payments between fiscal 2016 and each succeeding year.

The budget analysis also provides a chart showing the increase for each county.

A complete listing of all fiscal 2015 budget documents affecting county governments can be found on MACo’s website under Research, then Budget and Finance.