The Bottom Line on Teacher Pensions

It's no secret that funding for the state teacher pension plan is going to be controversial in the next session of the Maryland General Assembly come January. Last year, Senate President Mike Miller put on a full court press to shift the pension costs from the state to the counties. What he got was a study commission that is scheduled to report back out before January.

Unfortuantely, Miller is focussed on the wrong problem. His concern appears to be limited to offloading the costs from the state to balance their books - regardless of the impact on county budgets. But he misses the underlying problem of ensuring the long-term financial health of the plans.

As recently as 2000, the state pension system was fully funded. As of last summer, the funding status had dropped to 64%. Simply shifting the costs does nothing to address this funding shortfall. So what caused the drop?

It's fairly simple. There are four reasons:

1. Investment losses. To quote the well-worn cliche: "it's the economy stupid". Like every pension and retirement plan in the nation, the Maryland pension system has been battered by a drop in investment returns (-20%) and asset value (-22%) in the last year alone due to the recession.

2. Accouting gimmicks by the state. In 2002, the state mandated a "corridor funding formula" that served to reduce the annual cost to the state. No other state in the nation using this technique, and the result has been to artificially lower the State's contribution to the plan.

3. The fund is underperforming.  A recent report compared the performance of the Maryland plans to those in other states, and found that the Maryland plan "has significantly trailed the median investment returns of its peers to the tune of $3 billion over the last ten years" and that the substandard results "may be the result of asset allocation decisions, manager investment selections, or both".

4. Salaries have gone up. Not in the last three years, but they are higher now than in 2000. This is in no small part due to funding incentives provided by the state (the Bridge to Excellence, etc.). Salaries are negotiated locally - but we shouldn't forget that it is the state that a) sets the benefit levels, b) uses 'corridor funding' to underfund the plan, and c) chooses the investment managers.

The state's "Benefits Sustainabilty Commission" has begun work, and there are a number of useful reports at that link for those interested in reading in more detail about these issues. It's important for them to understand how we got here as they ponder their recommendations. Simply shifting the costs to the counties does nothing to address the funding problem. Something needs to be done to ensure the long term financial health of the plans, but let's not blame the victims.

In the last few years, teachers have increasd their annual contribution to their pensions from 2% of their salaries to 5% of their salaries. We are doing our part. But we didn't cause the recession. And it's the state that is responsible for its accounting gimmicks and poor investment management.

Tom Israel, MCEA Executive Director