At a recent meeting of the State Pension Board of Trustees, the Board heard the results of the June 30, 2015 Actuarial Valuation for fiscal year 2017 from the Board’s actuarial consultant, Gabriel Roeder Smith & Company (GRS). The results include a teacher pension normal cost projection for FY 2017, the first year in which Maryland’s local school boards are statutorily required to assume the full financial responsibility for actual teacher pension normal costs.
In 2012, the Maryland General Assembly enacted legislation that shifted teacher pension normal costs to local school boards. Normal costs are generally defined as the costs attributed to future pension benefits accrued by members of a pension plan in the current year. Normal costs fluctuate based on many factors, including the salaries, hire ages, retirement ages, assumed investment return, and life expectancies of plan members.
As part of the teacher pension shift, the Maryland General Assembly also required county governments to pay certain scheduled dollar amounts to the local school boards as part of their education budgets for FY 2013 to FY2016. After FY 2016, the counties must include this fixed amount from FY 2016 every year within its education budget. 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.
As described by the Department of Legislative Services,
Beginning in fiscal 2017, the fiscal 2016 payments by the counties are included in subsequent years’ MOE [maintenance of effort] calculations, so local school boards are responsible for any increase in normal cost payments between fiscal 2016 and each succeeding year.
While the actuarial valuation has not been finalized, the GRS results found that the projected amount of statewide teacher pension normal costs in FY 2017 are $25 million more than the amount that local school boards paid towards teacher pension costs in FY 2016. This is not entirely unexpected inasmuch as the statutorily mandated payment of $254.8 million for FY2016 was calculated in FY 2012 for the “cost-shifting” legislation that was passed in that year, and is based largely on the normal cost for the Teachers’ Pension System in FY 2012, and not the actual normal cost for FY 2016. The actuary’s draft projection for pension normal costs in FY 2017 is $279.8 million.
The $25 million difference is substantial; however, it is less than the amount projected in previous reports. In 2014 the Department of Legislative Services published a projected $73 million difference. It was expected during the 2012 legislative session when the “cost-shifting” legislation was passed, that the FY2017 normal cost for the Teachers’ Pension System (TPS) would be lower than what is currently projected, due to the effects of the benefit changes enacted through the 2011 pension reforms.
According to GRS, the reforms are certainly driving down the normal costs, not just for the TPS, but for all State systems, except Judges. This is seen in the June 30, 2015 Actuarial Valuation for the State Retirement and Pension System, in which GRS reported that while the total normal cost for the TPS in FY 2017 is $304.5 million (local school boards being required to pay $279.8 million of this amount), this is a decrease from the total normal cost for that system in FY 2016, by $29.5 million.
While this is good news for the plan and the local school boards in that normal costs are declining and will continue to do so in the future, it does not eliminate the additional $25 million in normal costs that the local school boards will be expected to contribute this year. GRS explained that this $25 million increase is attributable to changes made in actuarial assumptions that directly impact the normal cost for this system. These changes were made to reflect more accurately the retirement and mortality rates of members of this plan based on recent experience.
For more background, see our posts on Conduit Street, State Pension Board Adopts New Actuarial Assumptions, Could Lower Teacher Pension Normal Costs, Teacher Pensions Continue To Pressure State, School Budgets, and State Policy Changes Boost Teacher Pension Costs.
For more information on the most recent projections, see the actuary’s report.