At the end of the 2015 legislative session, there was a great deal of confusion and competing information regarding Governor Hogan’s proposals around pension funding. Rather than release $68 million in school funding that the General Assembly overwhelmingly voted to appropriate to our schools, on May 14 the governor announced that he would instead redirect that money to the pension system. But there’s a catch: the governor lacks the authority and ability to do this.
Confused? Read on for an explanation.
The governor lacks authority to do what he proposes
Gov. Hogan argues that instead of providing $68 million in funding for schools he wants to add another supplemental payment to the state pension system. While his talking point is intriguing, he has no power to unilaterally make this happen, according to the nonpartisan Department of Legislative Services.
The school funding he has chosen to ignore can only be used for education funding, as outlined in budget language adopted by the General Assembly. The governor has decided not to use it for schools. As a result, the money cannot be used for any other purpose. At the end of the Fiscal Year (June 30, 2016), if the money is not used for education, it will move to the state's reserve fund and be available to be used for future budget issues or address any deficiencies in the FY16 budget (for example, a budget category is overspent and the state needs to use reserve funds to backfill).
The best case for the governor's thinking is that we have no budget deficiencies in any category (which rarely if ever happens) and this unspent education money is now subject to end of fiscal year accounting. The end of year accounting requires the state to look at all funds in the reserve account, set aside $10 million for the Rainy Day Fund, and then split the balance of the reserve account between the State Pension Fund and more for the Rainy Day Fund to protect against future emergencies. That split is subject to a cap where no more than $50 million of any reserve fund split could be moved to the pension system through this end of year accounting.
All of this is complicated background to say the best the governor could do with this unused education money is move $50 million to the pension fund in July of 2016. He has no authority to do anything with that money today...and today is when that money is needed in school districts to prevent layoffs, protect programs, and meet the needs of students and schools.
MSEA is fighting to protect pensions
Educators make up the majority of members of the state pension system, so we certainly have a vested interest in making sure that schools have the resources they need and our pensions are funded at levels that are sustainable and will not compromise pension benefits. If our pension benefits were truly being put at risk by the General Assembly, we would be the first ones to fight back. But this is not the case.
It is worth setting the record straight on where things stand with the pension system, and that requires a little history. Back in 2002, the state adopted a pension funding approach called "corridor funding." They did that when the pension system was funded at 102% of needed funds. The corridor approach allowed the state to reduce the pension contribution the actuaries recommended the state should make. The actuarial recommended contribution is the gold standard for what states with healthy pension systems should be making in order for the fund's benefits to be sustainable for current and future employees. The state's use of corridor created a continuous underfunding of the employer (state) contribution, setting the stage for the 2007-8 stock market crash to have a huge impact on the pension fund, dropping it to about 60% funded status.
The consequently larger unfunded liability created a negative political environment in 2011 that encouraged the General Assembly to increase the contributions of employees and slash benefits for new hires. The Assembly's goal was to make payments in addition to the corridor payment until the system reached 80% funded status (a high standard of health for public pension systems). They estimated that would happen in 2023. Over the last few years, this additional payment to corridor, known as the supplemental payment, has been a political football because the state has been digging out of a sluggish economy while trying to keep commitments to things like education funding and still reaching the funded status goal of 80% funded.
Luckily, we have had a few good years of stock market returns and the pension system has now reached 67.7% funded status. The General Assembly took major steps to build on this growing strength this year and create even firmer footing for the pension fund by agreeing to get out of corridor funding next year. That is huge. MSEA—along with bond rating agencies—has been fighting to get out of corridor and to use actuarial required contribution (ARC) levels since corridor was adopted in 2002. Making the ARC payment will ensure that benefits are not at risk with this new funding approach. It is a big win for pension sustainability. And, in addition to the ARC payment, the state is still agreeing to make a supplemental payment.
Pension funding by the numbers
Instead of that supplemental payment being $200 or $300 million (as was the plan when it was a supplement in addition to corridor), the General Assembly set the ARC supplemental at $75 million. It was scheduled to be $150 million. That is the number the governor still wants to hit. But the drop from $150 million to $75 million is what generates the governor’s talking point of a 50% cut in the pension payment in the coming year. However, that really fails to recognize the significant policy and funding commitment made by shifting to ARC payments—not to mention the raw dollar realities. The state's pension payment in this year's balanced budget is $1.52 billion instead of $1.59 billion. It is less, to be sure, but hardly matches the rhetoric you may have heard.
When Maryland makes ARC plus a supplemental payment of any kind, we will be the only state in the nation with a AAA bond rating that adds to their ARC payment. That continuation of the supplemental is still the state showing their commitment to reach the 80% funded status by 2023, and that's what the budget plan approved by the General Assembly still does, regardless of the governor's interest to use classroom dollars as a secondary supplemental payment.
But you don’t just need to take it from MSEA—see the State Retirement Agency’s take on the pension actions taken by the 2015 General Assembly.