Maine’s Public Pension Fund Fiasco

by Rep. Meredith Strang Burgess

All across the country, public pension plans are in a royal mess. A recent study by the Pew Center on the States found that the plans are $1 trillion short of the $3.4 trillion needed to pay the benefits promised to state workers and teachers.

The real gap is actually much higher. The study was conducted prior to the stock market collapse of 2008 and 2009, which blew a giant hole in pension fund investment earnings. This is a train wreck waiting to happen. States may be forced to reduce benefits, raise taxes or slash government services to stave off a financial catastrophe.

Maine, not surprisingly, is right in the thick of the debacle. The Maine Public Employees’ Retirement System – or MainePERS for short – has what is called an unfunded liability of $3.054 billion. The system has about $9 billion on hand, but it will need at least $12 billion to pay the pensions for all current and retired state workers and teachers. That’s a huge amount of debt for a poor, struggling state; and it’s a major reason why we seem to have a permanent budget crisis.

How did we get into such a predicament? That’s easy – politics. Throughout the 1960s and ‘70s and into the ‘80s, the teachers union and the state employees union lobbied to expand the size of their pensions without increasing the contributions. Their allies in the Legislature actually changed the laws to enlarge the pension payouts. The MainePERS agency didn’t even have an actuary on staff to calculate the impact of the changes. The cost for more generous pensions was simply pushed into the future, leaving somebody else to deal with the fallout.

By 1997, as the unfunded liability kept growing, alarmed taxpayers had seen enough. They mounted a citizens’ initiative to force the state to stash extra money into the system. The initiative passed as an amendment to the Maine Constitution, effectively tying the hands of the Legislature.

The initiative brought forth an amortization schedule – like a mortgage pay-down schedule – which required the state to contribute enough money over 30 years to prevent a system collapse. Actuaries calculated the unfunded liability at about $3 billion. That amount – plus all lost investment income – would have to be paid off by 2028. Under current investment models, taxpayers will end up paying in $6.5 billion. In other words, the Legislature’s reckless action in failing to stem pension increases now forces taxpayers to pay not just the $3 billion unfunded liability but also $3.5 billion that the MainePERS would have earned through investments had the pension system been fully funded all along.

That $6.5 billion would go a long way to cover education, roadwork, social services, state parks and all the other things government funds. Unfortunately, we won’t have it, and the shame is that this problem could have easily been avoided. Today’s taxpayers have ample reason to be angry at those legislators who foisted these enormous costs on them by tossing aside financial responsibility in their quest for votes from the teachers union and the Maine State Employees’ Association.

Here are a few numbers for you to ponder. In the current budget for fiscal years 2010 and 2011, the state is paying $434 million towards the unfunded liability. In the next budget, for fiscal years 2012 and 2013, the amount jumps to $477 million. It rises steadily until it balloons wildly in the “out years.” By the biennial budget for 2027 and 2028, the final payment, the total amount hits to $920 million.

(As an aside, the state also faces a separate unfunded liability of $2.2 billion to cover health insurance for retired teachers and state employees. That’s a story for another day.)

In the interest of controlling the cost of state government, we should make some changes. Maine, like most states, can’t reduce pensions for current retirees and current employees. Collective bargaining agreements set them in stone. But we should make reforms for new employees. That’s exactly what other states are already doing by altering the pension formula or raising retirement ages.

The Pew report observes that a few states are taking lessons from the private sector by sharing more of the risk of investment with employees though systems that combine elements of defined-benefit and defined-contribution plans. As the report says, “These hybrid systems offer a lower guaranteed benefit, while a portion of the contribution – usually the employees’ share – goes into an account that is similar to a private sector 401(k).”

Nebraska and Georgia have such hybrid plans in place for new hires, and Alaska and Michigan have actual 401(k) systems for new workers. Plans like these provide portability of retirement investment that would be ideal for people who work for Maine state government and then switch to the private sector or for retired military members who become public school teachers here.

All told, 38 states have passed legislation since 2007 to reform their public pension systems. It’s time for Maine to follow suit.

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