While we very much appreciate the Governor's decision not to support an increased shift in the costs of teacher pensions onto local counties, we believe he is listening to bad advice on how to restore the long term financial health of the pension plan. It is not necessary to gut the plan's benefits in order to 'save' it.
Understanding the State Teacher Pension Plan Issue
1. What is referred to as the state teacher pension plan covers most school system employees as well as most employees of the state’s public libraries and community colleges.
2. In 2000 the state teacher pension plan was fully funded.
3. In 2004, the General Assembly voted to begin underfunding the plan: each year contributing less than the actuarially determined funding level. (One estimate has calculated the underfunding at close to one billion dollars).
4. In 2006, the General Assembly voted to increase employee contributions from 2% to 5% to pay for improved benefits. The improvement was to be phased in over 22 years. The increased employee contribution paid the full cost of the improvement going forward. The General Assembly agreed to make the improvement retroactive eight years back to 1998. They took no further action to improve funding.
5. In 2008 the economy and investment markets crashed. The plan’s asset values dropped by twenty percent. There is general agreement that the market crash accounts for about 85% of the last report on the unfunded accrued liability, which the General Assembly’s underfunding formula accounts for the other 15%.
6. In 2011, The Governor has proposed reneging on the 2006 agreement. His proposal would have plan participants paying more than they are now, for benefits that are as bad as they were before 2006 – when Maryland was recognized as having one of the worst teacher pension plans in the nation. For a retirement benefit that teachers paid 2% of their annual salary for in 2005, teachers would now have to be paying more than three times that amount – at 7% of their annual salary. Not only would teachers lose the phase in of the improved pension benefit approved by the General Assembly in 2006, they’d essentially end up with a 5% pay cut to maintain the same inadequate retirement benefit they had before 2006.
7. There are adjustments that can be made in the pension plan to improve its long term financial health. Issues of the vesting period and early retirement rules can and should be reviewed. The State Retirement Board itself has proposed changes in corridor funding and smoothing rules that both could reduce the unfunded accrued liability. The Board is also conducting an experience audit this spring that will update plan assumptions about salary growth, retirement age, etc;, and it is expected that the audit will improve the plan’s financial outlook as well.
8. In 2010 the markets have recouped more than half their losses The Dow Jones Industrial Average is back above 11,000. These market improvements will begin to be reflected in the pension plan's next annual valuation. As State Treasurer Nancy Kopp has so accurately observed, the timing of the state’s annual plan valuation in relation to the peaks and valleys of the market, has a significant and random impact on the plan valuation. It is simply a snapshot in time.
9. Just as it was a mistake for the General Assembly to begin underfunding the plan on the heels of the booming investment market; it would be a mistake for them to gut pension benefits based on worst point in the recent bear market.
10. It is in all our interests that the state pension plan be restored to its former financial health. But it doesn’t have to be done by slashing promised retirement benefits to teachers, librarians, janitors and school bus drivers.
Tom Israel, MCEA Executive Director
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