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Date: 02/07/11

Rescuing Maine's Public Pension System

By Rep. Eleanor Espling

In running for the Legislature last year, I campaigned on the need to reduce Maine's state debt, which has now reached $12.7 billion. One of the largest pieces of that debt is $4.3 billion owed to the system that pays pensions to teachers and state employees. As someone more accustomed to dealing with my household budget, such huge sums of money are hard to imagine. But what is easy to imagine is that paying off this enormous debt could squeeze out other state responsibilities, such as aid to schools, MaineCare and road maintenance.

How did we get into such a predicament? Most of the blame goes to politics and irresponsible government. Throughout the 1970s and '80s and into the '90s, the unions representing teachers and state employees lobbied to enlarge the size of their 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 fully fund them. The cost was simply pushed into the future, leaving somebody else to deal with the fallout. That "somebody else" is us.

A couple of years ago, the unfunded actuarial liability (UAL) stood at $3 billion, but large investment losses in the stock market crash of 2008 and 2009 pushed the shortfall up to $4.3 billion. The pension funds depend on investment income for 60 percent of their total intake. When investments turn sour, the taxpayers of Maine are forced to cover the gap.

The problem escalated from serious to critical in July. That's when it was announced that taxpayers will have to fork over $916 million in the next biennial budget, for fiscal years 2012 and 2013, to cover pension obligations. That will include approximately $210 million to cover "normal" pension costs, which represent the state's routine contribution of 5.5 percent of payroll. (State employees contribute 7.65 percent of their incomes to the trust fund, a percentage fixed by law.)

The big financial nut for the next budget is the $706 million in mandatory payments towards the UAL, an increase of more than $220 million from the amount paid in the current budget.

An amendment to the Maine Constitution passed in 1995 mandates that the UAL be paid in full by 2028. A back-loaded amortization schedule sets the amount that taxpayers must pay every year. With the UAL's increase from $3 billion to $4.3 billion, the state's biennial payments have surged. From $706 million in the next budget, the amount hits $772 million in the 2014-2015 budget, then goes to $848 million in the following biennium. The payments explode upward in the "out years," reaching $1.4 billion in the 2027-2028 budget cycle.

All told, it will cost taxpayers $10 billion to retire the debt, because they must pay not just the principal but also the investment income the fund would have generated if it had been fully funded all along.

Obviously, these payments will heavily impact a two-year budget that stands at $5.8 billion. Considering the daunting magnitude of the problem, change is inevitable, and the pensions of roughly 76,000 plan participants hang in the balance.

To mitigate the long-term financial stress, I have submitted a bill to raise the pension eligibility age from 62 to 65 for those folks not yet vested. Teachers and state employees vest in the system at five years, so my bill would affect those with less than five years on the job and, of course, all new hires.

Another Republican representative has submitted a bill that would bar non-vested and first-time legislators from participating in the pension system. His reasoning is that there is an inherent conflict of interest when legislators could vote for increases in their own pensions - the problem that created this mess in the first place.

State Rep. Rich Cebra, another Republican, has submitted a bill to increase the employee contribution rate from 7.65 percent of income to 8.65 percent for six years. The hope is that the trust funds' investment income returns to normal levels as the economy slowly rebounds. An investment recovery would automatically lower the UAL and the state payments required to cover it.

These changes by themselves won't fix Maine's pension shortfall. Nothing will make the debt disappear. But these bills represent a start towards long-term solvency for the system.

State Rep. Eleanor Espling (R-New Gloucester), a first-term legislator, serves on the Inland Fisheries and Wildlife Committee