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Opinion

Date: 11/22/10

Pension crisis creates legislative challenge

By Rep. Rich Cebra

As a new Legislature begins, one of the most important discussions will involve the public pension system for teachers and state workers. The cost of the system has exploded recently and threatens to squeeze other government functions, such as schools and MaineCare. Moreover, writing a new state budget in lean times will be greatly complicated by a pension system devouring ever-larger amounts of tax money, year after year.

This is no minor issue. We're talking about the retirement income of roughly 80,000 plan participants, including those already retired and those still active. Last year, the system paid out $622 million in benefits. State workers and teachers don't contribute to Social Security, so for many of them their state retirement is critical. But there is only so much that taxpayers can bear.

The root of the current problem is the "unfunded actuarial liability" (UAL) in Maine's Public Employees Retirement System, better known as MainePERS. This is the amount that ultimately will be needed to honor pension promises to all qualifying workers.

The $4.4 billion UAL actually will cost taxpayers $8.9 billion to pay off by 2028, the deadline set by a 1995 amendment to the Maine Constitution. The state - that is, us - must pay not just the $4.4 billion principal but also the investment income that would have been generated if the system had been fully funded all along.

In the coming biennial budget for fiscal years 2012 and 2013, taxpayers will have to fork over $916 million to cover pension obligations. That includes approximately $210 million to cover "normal" pension costs, which represent the state's contribution of 5.5 percent of payroll. The big financial nut for the next budget is the $706 million in payments towards the UAL, an increase of $220 million from the installment paid in the current budget.

The UAL payment hits $772 million in the 2014-2015 budget, then leaps to $848 million in the following biennium. The costs explode upward in the "out years," finally reaching $1.4 billion in the 2027-2028 budget cycle.

Considering the daunting magnitude of the problem, some sort of changes look inevitable. I have already submitted a bill to lighten the burden on taxpayers, at least a little. My proposal would adjust the annual cost-of-living adjustments (COLAs) to the beneficiaries for six years. Folks receiving small pensions would get the full COLA, while people at the top end would receive no inflation adjustment. Those in the middle would get a partial COLA.

Additionally, my bill would increase the participants' contribution from 7.65 percent of payroll to 8.65, also for six years. More fundamental restructuring might be required, and various scenarios are being contemplated.

How did we get into such a predicament? Most of the blame goes to politics and irresponsible government. Throughout the 1970s and '80s, the unions representing teachers and state employees lobbied for bigger pensions to compensate for salaries that were, at the time, relatively low. Their allies in the Legislature actually changed the laws to "enhance" the pension payouts, but then neglected to fund them. Like a time bomb, the cost was simply pushed into the future, leaving somebody else to deal with the fallout.

With the enhanced payouts, the Maine Heritage Policy Center calculates that 2,101 government retirees are set to receive a lifetime pension benefit of $1 million or more. Another 9,193 retirees stand to receive at least $500,000.

A couple of years ago, the unfunded liability stood at $3 billion, but with huge investment losses in the stock market crash of 2008, the shortfall has jumped to some $4.4 billion. The fund depends on investment income for 60 percent of its total intake. When investments lose money, the taxpayers of Maine must to cover the gap.

Maine is certainly not alone in this crisis. Public pensions are front-page news nationwide because most other states face the same problem, with investment losses exacerbating their unfunded liabilities. The combined unfunded liability in state pension funds is estimated at around $3 trillion.

So serious is the situation that The New York Times ran an article last August entitled "Battle Looms over Huge Costs of Public Pensions." The story discusses a "class war coming to the world of government pensions," pitting pensioned teachers and state workers against the taxpayers who have to pay for those retirement checks.

As The Times' article says of the taxpaying public: "Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of these people will be paying higher taxes or getting fewer services as their states put more money aside to cover those pension checks."

Here in Maine, the huge UAL payments will heavily impact a General Fund budget that stands at about $5.88 billion for the current biennium. Our best hope is for an investment recovery. A strong return on investments would automatically lower the UAL and the state payments required to cover it.

Teachers and state workers count on their retirement system. With $10 billion in the fund today, there is no imminent danger of running out of money. But it may be time to devise a more affordable system for new public employees, one that Maine taxpayers can afford over the long haul.

State Rep. Rich Cebra (R-Naples) is entering his fourth term in the Maine House

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