With the state owing more than $4 billion to pay off past pension debts, Maine’s public employees’ retirement system will get a lot of attention from the Legislature next year. To ensure that attention is focused and productive, legislative leaders should create a Joint Select Committee on Pensions.
Under an agreement reached last week, oversight of the Maine State Retirement System was shifted from the now-defunct Labor Committee to the Appropriations Committee. Because many of the retirement system’s concerns are financial, that change may make sense for the long term. But Maine has immediate pension funding problems, which would be better solved by a group devoted to this work.
Sen. Richard Woodbury, an independent from Yarmouth who is an economist and has done much research on state pension plans, would be a good person to lead this group.
A brief history: Several decades ago the state did not set aside enough money each year to meet its pension obligations. Over time, this led to a huge unfunded liability. In 1991, for example, the assets in the Maine State Employee and Teacher Retirement Program represented only 36 percent of the plan’s expected liability, among the worst in the country.
Because of this continuing shortfall, a constitutional amendment was passed in 1995 requiring that the state fully fund the retirement system by 2028. It also required that no new benefits could be added to the plan unless they were fully funded.
Another provision requires that market losses must be recovered within 10 years. This is especially problematic now because the pension system lost more than $2 billion in value when the stock market declined in 2008. That money must be returned to the system within 10 years whether the market recovers or not.
According to an analysis completed earlier this year, the retirement system will cost the state $916 million over the next two years. That’s up from $629 million during the two-year budget cycle that ended June 30. That figure accounts 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. Enough money is now being set aside to cover retiree payments, the so-called normal cost. The problem is sticking with a plan to eliminate the unfunded liability by 2028, a situation made worse by the stock market losses.
To continue to make those unfunded liability payments, cuts will have to be made elsewhere in the budget, a problem made worse by the budget gap expected to exceed $800 million.
A special committee on pensions could also examine the need for changes going forward. A popular proposal is to put state employees, at least partially, into Social Security. While this would actually cost the state more — Social Security requires that employers pay 6.2 percent of an employee’s salary into the system, while the state system’s payment is 5.5 percent of salary — it would bring more stability. Raising the retirement age for new hires should also be considered.