Maine retirement system cost rises by $287 million for next budget

Posted July 09, 2010, at 4:03 p.m.

AUGUSTA, Maine — An important number in the quest to gauge the severity of the state’s budget problems was released Thursday, helping reaffirm what almost everyone in state government already knew: The next state budget will require drastic cuts that some say will surpass $1 billion.

The Maine Public Employee Retirement System, which administers retirement payments to some 27,000 former state employees and teachers, will cost the state $916 million in the two-year budget that begins on July 1, 2011. That’s up from $629 million in this biennium, for an increase of about $287 million.

“That’s a big number no matter how you look at it,” said Rep. Emily Cain, D-Orono, the House chairwoman of the Legislature’s Appropriations Committee. “We’ve done a lot better than a lot of other states in making payments … but it’s a much bigger amount than we certainly have on hand right now.”

According to Sandy Matheson, executive director of the retirement system, the figures for the next two years were approved Thursday by the system’s board of trustees after the system’s end-of-year investment performance was calculated as of June 30. The totals account for both the cost of maintaining the program for past and present employees and paying off debts that accrued in years past when the program was inadequately funded. According to a law passed by the Legislature in 1995, the state must pay off the old debt, which totals more than $4 billion, by 2028.

Unlike many other programs and services in state government, the Legislature is required by law and the state’s constitution to fully fund the retirement system, which means that the $287 million increase must be covered with cuts in other areas or increases in taxes.

Ellen Schneiter, acting commissioner of the Department of Administrative and Financial Services, said the retirement system has several funding sources so the increase won’t all hit the General Fund, which supports the majority of state programs. Schneiter said the increase will affect the General Fund by about $205 million.

“This is not much different than we have been anticipating,” she said Friday. “What we need to lay out is a menu of options and alternatives for the next Legislature about how to address this problem. This isn’t an insignificant amount of money.”

As it stands, payments to the retirement system will escalate dramatically in the coming years, going above $800 million per year by 2019, according to data provided by Matheson. But in 2029, the year after past debt is scheduled to be paid off, the yearly payment will plunge to about $200 million, which is less than this fiscal year’s payment of $322 million.

The figures from the retirement system come at a time when Maine already is facing a budget hole in the next biennium approaching $1 billion because of withering state revenues and the conclusion of stimulus funding from the American Recovery and Reinvestment Act, Schneiter said. State revenue forecasters predict that the economy will begin to rebound in 2013, but not in time to avoid what Sen. Peter Mills, R-Cornville, called “one of the worst budget crises in the state’s history.”

Mills sponsored a resolution last year called “A Resolve to Reform Public Retirement Benefits and Eliminate Social Security Offsets,” which was passed by the Legislature in June 2009. The resolution calls for the retirement system to work with state budget officers and the State Employee Health Commission to combine and overhaul the retirement and retiree health care systems for all employees and teachers hired after Dec. 31, 2010.

“We have a crude system that needs to be drastically amended,” said Mills, who has opted not to try to reclaim his Senate seat. “The impact over the next several years is going to be pretty big, and there isn’t anything we can do about it in the short term.”

Matheson said the size of the numbers released Thursday can lead people to believe that state retirees have a “Cadillac plan,” but that’s not the case. The average state employee who retires after 25 years of service receives a package of about $24,000 a year and teachers in that category receive about $26,000. An employee or teacher retiring after 40 years of service receives a retirement income kof nearly 100 percent of his or her salary. With 37 years of service, they would receive retirement income of 74 percent of their average highest income.

Connecticut, by contrast, pays a 37-year retiree 50 percent of average highest income, though Connecticut employees also pay into the Social Security system, which supplements their retirement income. Maine state employees and teachers do not.

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