$4 billion pension problem plagues Maine budget

Posted July 23, 2010, at 8:25 p.m.

AUGUSTA, Maine — A state budget catastrophe that has been building for decades is suddenly receiving a lot of attention, though most state officials recognize that little can be done in regard to the state employee retirement system other than pay the bills as they come.

Even Rep. James Hamper, R-Oxford, who is sponsoring a bill aimed at overhauling the system, acknowledged that his effort would do little to change the fact that the retirement system will be a major drain on the state budget for years to come. That’s because of past debts — known as the “unfunded liability” — totaling more than $4 billion and a provision in the Maine Constitution to pay the debt off by the year 2028.

“My bill does not do much of anything for the unfunded liability,” said Hamper on Thursday. “This is just to get the conversation started. The [Legislature’s] Labor Committee can use it for a vehicle to do just about anything.”

Though his bill, “An Act to Ensure Retirement Benefits for Maine State Employees,” is little more than a title at this point, Hamper said he favors pulling new hires out of the retirement system to some degree and allowing them to make contributions to either the federal Social Security Administration or a 401(k) plan.

In retirement parlance, Hamper is proposing switching from a “defined benefit” program — when retirees are guaranteed a certain amount of benefits regardless of the condition of the retirement fund — to a “defined contribution” plan, in which retirement benefits are based on how much an employee pays in and earns on in-vestments.

“Many other states realized long ago that defined benefits was going to kill them in the future,” said Hamper.

Officials with the Maine Public Employees Retirement System announced earlier this month their projections for how much the state will have to pay to maintain the system for current employees plus pay down past debts. All told, the cost to the state in the 2012-13 budget will be $916 million, which is $287 million more than in the current biennium. The cost is scheduled to increase significantly every year until 2028, which is when the past debts are required to be paid by the Maine Constitution. By 2020, according to that schedule, payments by the state will top $800 million a year.

A task force report issued to the Legislature’s Labor Committee last March identified seven scenarios for possible reform, but concluded that any one of them would cost the state more than it is paying now. For some legislators, that fact might squash any hope of reforming the system.

“It’s a matter of dollars and cents,” said Rep. John Tuttle, D-Sanford, the House chairman of the Labor Committee. “If we go to Social Security, where are we going to come up with the extra money? In these financial times, I think it’s probably not the way to go.”

Sen. Troy Jackson, D-Allagash, who co-chairs the Labor Committee with Tuttle, said he has seen numerous proposals to overhaul the system fail during his eight years in the Legislature.

“If you’re just looking to save the state money, there’s nothing in the works to do that,” said Jackson. But for some, saving money isn’t the primary objective.

Sen. Peter Mills, R-Cornville, has been proposing reforms to the retirement system for years, culminating last year when he sponsored a successful resolve by the Legislature that created a task force that produced last March’s report.

Mills said his idea of reform is correcting what he sees as an unfair system that requires employees to hold onto their jobs for decades so they can attain full retirement benefits. Because Maine’s public employees don’t pay into Social Security, they have to “start over” again if they leave their public-sector jobs, said Mills. As it stands now, fewer than half of all state employees stay with their jobs long enough to attain full benefits.

“We’re not treating the younger people fairly at all,” said Mills, who is not seeking re-election to the Legislature after an unsuccessful run to become the Republican nominee for governor. “We’re just running the system for the benefit of the senior union people.”

Bruce Hodson, president of the Maine State Employees Association, said the union opposes any changes to the current system because it is well-managed and rewards employees for long-term service to the state at wages lower than they could attain in the private sector. He called Mills’ argument about unfairness to younger employees a “red herring.”

“It’s always been something that people know when they come in for a job, and it’s what they expect if they leave,” said Hodson. “I think it’s an incentive to get good people to stay with the state.”

Hodson said the real issue facing the state isn’t the structure of the retirement system, but how to pay off the unfunded liability, which represents an escalating percentage of the total costs to the state.

“We’re paying the price for what past governors and legislatures did or didn’t do,” he said. “This is just one more thing that the anti-government people want to take away from us.”

The Legislature’s Labor and Appropriations committees are scheduled to receive a report at 1 p.m. Tuesday from Sandy Matheson, executive director of the retirement system. Members of the Labor Committee said they viewed the meeting as a jumping-off point for further discussions.

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