Maine’s Pension Crisis Hits the Breaking Point

by Rep. Pete Johnson

On July 20, the New York Times featured Maine in a front-page story. It wasn’t about lobsters or summertime tourists. The article dealt with Maine’s public pension crisis, which has finally reached the breaking point.

For the next governor and the next Legislature, a nightmarish scenario is emerging when it comes to a state budget and the massive increase in pension funding that will be required. For the 68,000 teachers and state workers already in the system, either as active employees or current retirees, some sort of change now looks inevitable to rein in costs.

The news that stunned Augusta came down on July 8. The executive director of the Maine Public Employees Retirement System announced that the state will have to contribute more money in the next budget to cover pension costs – a lot more. In the current two-year budget, taxpayers have supplied $629 million to cover the normal pension contribution and the unfunded actuarial liability (UAL) installment payment. In the next budget, the amount soars to $916 million.

We are talking about an increase of $287 million, driven in part by the pension system’s 2008 investment loss of $2.25 billion. That loss, coming on top of the previously existing UAL, has left the plan $4.43 billion short of the money needed to fully pay the pensions of today’s teachers and state employees and those already retired.

A breakdown of the General Fund payments over the next two years shows that the cost of paying down the unfunded liability is more than triple the routine pension contributions. In the 2012 fiscal year, starting next July 1, the state will pay $103 million in “normal” pension costs and $344 million towards the UAL. The following year, the normal cost runs to $106 million but the UAL component hits $361 million.

Look at this another way. The current two-year budget is $5.4 billion. If we were paying $916 million in pension costs this year, it would amount to 17 percent. For context, consider that 80 percent of the budget goes for two things – aid to local schools and health and human services, mostly MaineCare.

The next budget, however, could be even smaller, because the state won’t have the $625 million in federal stimulus money it used to augment school and MaineCare funding. If we have to cut around $1 billion, as many experts now predict, the pension payment creeps up to about 21 percent of the budget. That would put the squeeze on school funding and health and human services, while leaving nothing at all to run the rest of state government.

Obviously, something has to give. The large sums of money required to pay down the pension debt have to come from somewhere, but reaching a resolution could be an ugly spectacle. As State Sen. Peter Mills (R-Somerset) is quoted in the New York Times article, “It’s going to rip the guts out of our budget.”

Many other states are in the same boat, having suffered enormous investment losses in the last two years on top of huge unfunded pension liabilities. Maine is at least on a disciplined repayment glide path, thanks to a constitutional amendment passed in the late 1990s to maintain long-term solvency.

That amendment gives the state until 2028 to pay off the UAL, based on a schedule of payments that’s similar to a mortgage amortization schedule. The trouble is that these annual payments begin to explode wildly in the “out years.” The last amortization table we have is from 2008. It forecasts UAL payments for 2027 and 2028 totaling $920 million. But those numbers were based on a UAL of $3 billion. Now that the unfunded liability has grown by more than 40 percent, to $4.43 billion, all the future payment numbers will escalate by corresponding amounts.

The next governor and Legislature have no choice but to come to terms with this burgeoning crisis. A new, more affordable system for new hires seems like a logical move. But the real problem is with the existing system, which must continue for current enrollees under Maine statute. That’s not to say reforms are off the table. As the Concord (NH) Monitor put it in a recent editorial, “In state after state, cost-of-living increases are being pared, the ability to pad pensions with overtime and vacation pay is being curtailed, and employee contribution levels are being increased.”

Partisan politics won’t solve this problem. In January, we should bring together all parties – Republicans, Democrats, union leaders and others – to find a way through this mess. We need to protect current employees and retirees without busting the budget or imposing higher taxes on the people of Maine. ###

State Rep. Pete Johnson (R-Greenville) serves on the Education and Cultural Affairs Committee