Maryland and the Stimulus: Responsibility Deferred

Few states can have used the benefits accruing to them in the Obama administration’s stimulus bill as irresponsibly as Maryland. We may pass in review the bill’s effect on Maryland public policy:

Pension and Retirement Systems

The Calvert Institute and the Maryland Public Policy Foundation recently published a study of Maryland’s public pension and retiree health systems indicating combined state and local funding deficits approaching $50 billion, and that figure did not consider the impact of the recent stock market crash. It further pointed out that the O’Malley administration and legislature had reduced to $100 million annual contributions toward the accrued deficit for health insurance subsidies.

In April 2006, the General Assembly created a Blue Ribbon Commission to Study Retiree Health Care Funding Options, which was to report by Dec. 31, 2008. In 2008, the legislature, quavering with fear at the probable contents of the report, postponed its due date until Dec. 31, 2009, two weeks before the start of the 2010 legislative session, thus postponing action on its recommendations past the 2010 election. The commission has now quietly released a required interim report, which is instructive both in what it records and in what it omits.

The commission declares that the state has unfunded retiree health liabilities to its employees of $15.2 billion, or $3,000 for every Marylander.

At present, the state funds such obligations on a “pay as you go” basis, now costing $314 million a year, a sum traditionally obscured in state budget documents by being scattered among agencies. If left unchecked, this cost will escalate to $600 million by 2014 and $1 billion a year by 2023.

Fully funding this deficit would require added state appropriations of $500 million a year. The last three budgets did not propose the required $1.5 billion in appropriations but only $410 million, of which only $148 million was actually appropriated. The actuarial deficit is thus only 1 percent funded.

What will the taxpayers of the state get for these huge future commitments? Seventy-six percent of the benefits go to retirees over the age of 65 who are already eligible for both Medicare and the new Medicare prescription drug program. The state program relieves middle-class state retirees who already enjoy Social Security and pensions much larger than private sector pensions of the deductibles and co-payments that Congress has determined are appropriately borne by ordinary retired taxpayers. Even more shockingly, 59 percent of the cost of the program goes to relieve retirees of prescription drug costs. The state program remains unchanged even though under the new Medicare Part D the maximum annual exposure of any retiree is only $3,150 more than under the existing Maryland plan.

The premise of the benefit program, as stated in the interim report’s introduction, is that “retiree benefits are an important component of the state’s overall strategy for attracting the best possible employees to public service.” This premise is totally unexamined. How many 25-year-olds are tempted into state service by an unfunded promise that 40 years hence they may be relieved of a maximum of $3,150 per year liability for prescription drug costs? Few, if any. For this reason, half the nation’s private employers with retiree health programs have abandoned them in recent years.

The state’s retiree health obligations derive not from recruiting needs but from political cowardice. Private sector employers with variable income flows know that improvident retirement promises quickly affect profit and loss statements and impair the tenure of the responsible executives. Term-limited public officials, by contrast, have an irresistible temptation to punt problems past the next election. Rather than pay salaries needed to recruit, benefits are promised for which the bills do not fall due until the governor leaves office or secures re-election. The result is an unambitious and immobile work force.

In Maryland, the bills are now falling due, since there are new governmental accounting standards and the bond rating houses have made it clear that arrangements must be made within the next several years to reduce or fully fund future obligations. They have left open, however, a short window of opportunity for further procrastination, and the O’Malley administration and legislature seem to be enthusiastically embracing it. The Deputy State Treasurer told the Maryland Troopers’ Association in November that “healthcare benefits are not part of the defined pension benefit and as such are subject to adjustment. . . While it has not been proposed at this point, it is possible that they may adjust the percentages to reduce the State’s liability going forward.” With the advent of the Obama administration stimulus package, any thought of this was abandoned by the O’Malley administration

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