Final Pension Affordability Report

We reproduce here to initiate the publication of important public documents on our blog site,the Final Report of the Pension Affordability Task Force, accurately characterized by one of its members as an exercise in “kicking the can down the road”


July 15, 2011

The Honorable Martin J. O’Malley


The Honorable Thomas V. Mike Miller, Jr.


The Honorable Michael E. Busch




On behalf of the Public Employees’ and Retirees’ Benefit Sustainability Commission, I am pleased to report that the commission has completed its work and submits this letter as its final report, as mandated by the Budget Reconciliation and Financing Act (BRFA) of 2010 (Chapter 484 of 2010). This letter is intended as a closing statement to the commission’s 2010 Interim Report, submitted to you in January 2011. The letter examines the accomplishments made in the 2011 legislative session and discusses issues to examine if additional changes need to be made.


The 2010 BRFA created the commission to study and make recommendations with respect to State-funded health care benefits and pensions provided to State and public education employees and retirees. The commission met seven times from October through December 2010 to hear briefings and deliberate about the options available to address its charge; at its final meeting, members approved actionable recommendations. The documents presented at all commission meetings can be found on the Maryland General Assembly’s website at


The Administration proposed changes to State pensions and employee and retiree health care at the beginning of the 2011 legislative session in House Bill 72 (2011 BRFA). These changes were amended and adopted by the General Assembly. The changes made by the Governor and General Assembly address the two key issues facing benefits: affordability, which is the ability of the State budget to support benefit costs; and sustainability, which is the long-term funded status of the benefits.


The commission is concerned that these steps may in the future turn out not to have gone far enough and that additional actions may need to be taken. In December 2010, the commission recommended that the affordability and sustainability of employee and retiree benefits be reviewed periodically. In line with this, Section 30 of the 2011 BRFA (Chapter 397) requires that the Board of Trustees for the State Retirement and Pension System provide the Governor and legislature’s Joint Committee on Pensions with a biennial report on the funding progress of the systems. The Honorable Martin J. O’Malley The Honorable Thomas V. Mike Miller, Jr. The Honorable Michael E. Busch July 15, 2011 Page 2


Since the submission of the 2010 Interim Report, the commission has held two additional meetings, the first on May 23, 2011, and the second on July 7, 2011. At the first meeting, the commission received presentations on (1) the pension and retiree health reforms adopted by the General Assembly during the 2011 legislative session and enacted by the Governor’s signature; (2) a proposal by the State Retirement and Pension System’s Board of Trustees to alter the system’s funding model; and (3) the pension reform proposal put forth by the House Republican caucus (HB 1344 of 2011). At the second meeting, the commission discussed and approved this final report. The briefing documents can be found on the General Assembly website with the 2010 Interim Report. These briefings did not address any issues that the committee had not already considered. Rather they summarized 2011 session actions or recommended specific proposals that addressed concerns raised by the commission. As such, this report will not specifically address what was presented at these meetings; instead the report considers them in the context of additional actions that the State may need to take.


The remainder of this report is divided into two sections. The first reviews the commission’s earlier recommendations and the progress made on those recommendations during the 2011 legislative session. The second section provides the commission’s recommendations for further legislative action to build on the work undertaken during the 2011 legislative session.


Progress Made in the 2011 Legislative Session

This section compares the recommendations made by the commission to the actions taken by the Governor and General Assembly.

Employee Health Care Costs



The State should adopt a goal of reducing State expenditures on employee and retiree health benefits by 10% (or roughly $100 million) to bring them closer to those of peer states. This goal should be accomplished through a combination of reductions to State premium subsidies for employees and retirees and plan design changes that reduce the State share of covered charges for medical services and/or prescription drugs. Special consideration should be given to the financial effects of these changes on low-income employees and retirees, and efforts should be made to minimize those effects. The Department of Budget and Management should continue to monitor the structure of the health plan as it relates to the total compensation package provided to State employees.



The statutory changes adopted during the 2011 session include an increase in prescription drug out-of-pocket limits and a reduction in the premium subsidy for retirees; out-of-pocket limits for active employees were increased through the regulatory process. In addition, prescription drug copayments will increase for both active employees and retirees; The Honorable Martin J. O’Malley The Honorable Thomas V. Mike Miller, Jr. The Honorable Michael E. Busch July 15, 2011 Page 3

Exhibit 1


summarizes these changes. Combined, these changes reduce State expenditures by approximately $36.9 million, or roughly 4% of State health benefit expenditures; general fund savings represent $20.2 million of the total. This falls short of the recommended 10% reduction in State expenditures.

The commission’s recommendations were partially adopted.

Exhibit 1


Prescription Plan Changes

Fiscal 2011 Plan for Both Actives and Retirees

Fiscal 2012

Active Employee Rx Plan


Fiscal 2012

Retiree Rx Plan




Preferred brand

Non-preferred brand










Out-of-pocket cap for individual/

individual and spouse

$700/$700 $1,000/$1,500 $1,500/$2,000
Retiree share of total premium 20% 20% 25%


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