According to a budget analysis prepared by the Department of Legislative Services, the normal costs of the Maryland Teachers’ Pension System next year will be higher than initially forecast when cost-sharing was enacted by the legislature three years ago.  The cost level next year is especially relevant to local governments because in fiscal 2017, the full normal costs will become the responsibility of local school boards.  The increase in the normal cost – prompted by the State Pension Board’s action, as well as salary increases taken by local school boards – means that, beginning in fiscal 2017, local school board contributions will increase by a projected $56.6 million over the original forecast.

The increase in normal costs is primarily due to new demographic assumptions used to calculate pension liabilities.  These new assumptions were adopted by the Pension Board following a regularly required actuarial experience study and recommendations of the pension system’s actuary. Variation in the increase in normal cost from county-to-county may be attributed to salary increases for teachers granted by local school boards. County governing bodies are not empowered under state law to participate in contract negotiations between school boards and employee organizations.

The budget analysis further details how normal costs have been shifted from the State to the local governments.  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, as stated,

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 [the Teachers Retirement and Pension Systems]. 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 paid 50% of the normal cost in fiscal 2013, phasing up to 100% of the projected 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 projected salary growth, 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 (MOE) 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’ MOE calculations, so local school boards are responsible for any increase in normal cost payments between fiscal 2016 and each succeeding year.

For more information, see our previous posts on Conduit Street, State Policy Changes Boost Teacher Pension Costs, Teacher Pension Costs Affect Budget Priorities, and Teacher Pension Shift and Its Effect on County Government.