Understanding the Debate over Maryland Teacher Pensions

Now that the election is over, Annapolis watchers are turning their attention to the upcoming state legislative session (Jan-April) and the ongoing debate over funding teacher pensions. An MCEA member recently asked about proposals to 1) eliminate "corridor funding" and 2) pay off investment losses over 10 years rather than five. Understanding those proposals is a good way to understand the debate.

Background on Maryland Teacher Pensions

In 2000, the Maryland State Teachers Retirement and Pension Fund was fully funded, largely due to investment gains in a strong market.

In 2002, the legislature voted to partially offset the cost of a statewide tax cut by changing the funding formula for the pension plan. The state's contribution rates were frozen at FY2000 levels as long as funded status was between 90% and 110%. That's the "corridor". And if the funding status fell below 90%, the state only had to increase its annual contribution by 1/5 of the shortfall.

In the subsequent eight years, several things have happened:

1. The 'corridor funding' accounting rules decreased the amount that the state goverment had to put into the pension plan each year.

2. In 2006 teachers won a significant improvement in pension benefits; moving the Maryland plan from one of the worst in the nation to the national average. Teachers increased their annual contribution to the plan from 2% to 5% of salary.

3. The recession caused a massive drop in both the value of the plan's assets and its annual investment income - as was true for every other investment fund in the nation.

"Corridor Funding" and Smoothing Investment Losses

The proposal to phase out corridor funding is strongly in the interest of pension plan participants. Corridor funding is an accounting gimmick that allows the state to put in less than it's share of plan contributions. (Remember - teachers have increased their contributions.)

A proposal to pay off investment losses over 10 years instead of 5 also sounds like a wise move.

Decisions affecting the long term stability of the pension plan should not be made on the basis of short-term market swings. Just as it was a mistake in 2002 - on the heels of the market boom of the late 1990s - to cut back on the state's contributions: it would be a mistake in 2010 to slash benefits because of the short-term investment losses of the recent recession.

Currently, the swings in the market are "absorbed" over 5 years. It's a means of smooting out the impact of swings in the market. Shifting to a 10 year smoothing formula lessens the immediate impact of wide swings in the investment markets.

Combining the two proposals is an intriguing concept. More importantly, it is shifting the discussion to the real issue of how to ensure the long term financial stability of the pension plan. Last year's debate in Annapolis over shifting the costs from the state government to local governments was a side show. Cost-shifting does nothing to address the underfunding of the pension plan.

A statewide "Commission on Employees' and Retirees' Benefit Sustainability" is due to issue an initial report in December, prior to the legislative session. Montgomery County is represented on the Commission by both State Treasurer Nancy Kopp and businessman Aris Mardirossian. A number of very informative briefing papers have been prepared for the Commission.

Here in Montgomery County, MCEA is meeting regularly with an "Ad Hoc Pension Work Group" designed to coordinate the County's strategy on the state pension issue. Led by State Senator Rich Madeleno, the Work Group includes state senators, state delegates, members of the county council and board of education, as well as representatives of the county executive, Montgomery College, and the school system - and college - employee organizations.

This issue will be one of several important debates in Annapolis this winter that will have serious implications for educators, public education, and taxpayers in Montgomery County.

Tom Israel, MCEA Executive Director.