More Pension Follies

More Pension Follies
With great fanfare, Governor O’Malley announced his 2014-15 budget. Three thick budget volumes were released. Nowhere in these volumes (with one minor exception) are any of the pertinent data concerning Maryland’s pension and employee health obligations disclosed. The re-design of Maryland’s budget documents carried out by the present budget secretary, Eloise Foster, during the Glendening administration insures this. Where budgets once disclosed statewide costs for pensions and employee benefits, now they are buried within the personnel appropriations for each individual agency. Where budgets once included intelligible data for institutions including costs per meal served and costs per square foot cleaned, now “performance budgeting” prevails. Objective data are forsworn; instead, agency performance is measured against constantly changing and arbitrarily determined “benchmarks”.

The State Retirement and Pension System has developed this technique into a fine art. Thus, in a recent quarter, when the investment returns of the Maryland fund were nearly 4% less than those of the California pension systems and nearly 2% less than those of an average of peer funds, a happy press release was issued, indicating that the Maryland fund had exceeded its “benchmarks”, a normal phenomenon in a rising market. (Similar press releases recording benchmark shortfalls are not issued in falling markets). This document was reproduced almost verbatim in the ever-faithful Baltimore Sun. The Sun similarly reproduced Maryland’s No 1 rating in the annual index issued by Education Week. When Calvert, followed by others, pointed out that the Education Week index was really an index of educational centralization, it was abandoned in embarrassment, which does not prevent the Governor and the state’s educational establishment from reiterating its now out-dated and repudiated ratings.

The Sun’s editorial page similarly reproduced the O’Malley administration’s pie charts, together with an editorial reporting on all the good things that it depicted as having been purchased with tax dollars. However the Sunpaper’s pie, like the O’Malley administration’s budget documents, omitted any depiction of or reference to the ever-growing slice allocated to public pensions and retirement benefits.

The new Maryland budget proposes spending approximately $40 billion, of which $10 billion are federal funds. . Had the state appropriated the amounts which its actuaries recommended to fund pensions ($1.545 billion) and retiree health care ($1.2 billion), nearly 10% of state-generated funds would have been devoted to these purposes, in addition to the 3% allocated to debt service (in a period when interest rates are unusually low).. Instead, the State funded only 87% of the recommended figure for pensions ($1.2 billion) and only 28% of the recommended figure for employee health care ($346 million). See Pew Commision on the States, The Widening Gap Update (2013).

It should also be noted that the actuarially recommended figures are based on projected investment returns that are grossly inflated. Until this year, a return of 7.75% was assumed. Although a variety of persons familiar with public finance, including former Mayor Michael Bloomberg and former Governor John Corzine as well as fund manager Warren Buffett have urged that rates of return in excess of 5% cannot be assumed, and although some states have recently reduced their projected returns to or below 7%, a proposal before the State Pension Board to reduce Maryland’s projected rate from 7.75% to 7.55% was amended at the behest of Budget Secretary Foster to phase in the change over four years. (Budget Secretary Foster, a recidivist offender when it comes to under-funding pension plans, previously devised the Glendening Administration’s “corridor” funding plan, a device for kicking pension obligations twenty years down the road)

The consequence of this, according to the Pew Foundation, is that Maryland has $71 billion in pension and retiree health care liabilities, but has set aside only $35 billion to pay for them.

Moody’s Investors Service, one of the three bond-rating agencies, takes an even more somber view of Maryland’s pension shortfall. Its chart of pension shortfalls, reproduced in the New York Times for February 25, 2014, pg.A17 places Maryland seventh among the states in the absolute amount of its pension shortfall, $49 billion, behind only Illinois ($187 billion), Texas ($132 billion), Pennsylvania ($66 billion), Massachusetts ($63 billion), New Jersey ($58 billion), and Connecticut ($57 billion).

When Maryland’s shortfall is measured against its annual revenue, Maryland’s pension deficit, 169% of annual revenue, is 6th among the states, being surpassed only by that of Illinois (318%), Connecticut (243%), Kentucky (211%), Hawaii (199%), and Louisiana (184%)

The one piece of hard data that was allowed to appear in the budget’s discussion of pensions was a comparison of the investment returns with those of peer plans (we will wager that this comparison will not appear in next year’s budget documents). This shortfall is discussed in the published article immediately following this one.

Since members of the press can be counted upon not to read the three-volume budget, the O’Malley administration thoughtfully held a press conference on “Budget Day” and exhibited and placed on its website a 50 page Power Point presentation relating to the budget. Nowhere in this document package did the O’Malley administration voluntarily disclose that it balanced its budget by arbitrarily under-funding the pension plan by $100 million for the second consecutive year, for good measure proposing to make this systematic under-funding permanent. The effect of this under-funding, coupled with pay increases given to state employees but denied to their counterparts in the private sector, is to eliminate any beneficent effects on the state budget that might have resulted from the administration’s timid pension reform plan of three years ago. Thus the Governor can point to the pension reform as evidence of fiscal conservatism while carefully concealing the fact that his subsequent sub-rosa actions have essentially nullified it.

The administration now, with the help of an entirely irresponsible legislative committee presided over by Sen. Kasemeyer, proposes to fund an “unexpected” revenue deficit by withholding an additional $200 million from the pension fund, thus wholly nullifying the new exaction placed upon state employees for the purpose of re-nourishing the pension fund. The Governor and legislators presumably consider that the impact of this will not be felt until after they leave office. In this, they are almost certainly wrong. The likelihood is strong that this latest caper will doom Maryland’s triple-A bond rating, which is hanging by a thread with all three rating services. Maryland will thereafter have to pay higher interest rates on its new bonds, at least a billion dollars of which have to be issued each year because of the 15 year constitutional limit on duration. The downgrade will almost certainly coincide with an increase in general interest rates as the Federal Reserve quantitative easing measures are withdrawn. It will be surprising if Maryland’s debt service costs do not increase by at least $ 40 million next year.


Posted in: Efficiency in Government, Fiscal, Markets and Privatization, State and Local Politics