Attention will soon focus on the governor’s spending proposal for the next two years. The state’s growing pension obligations will hang over the budget debate, threatening at times to overshadow it.
State Treasurer Bruce Poliquin describes the pension problem in dire terms in his weekly update and on his blog. The Maine Heritage Policy Center recently released a report, warning “Unfunded Pension Benefits to Bankrupt Maine’s Future.”
While the pension liability is a real problem that must be addressed, it shouldn’t be used as a cudgel to turn lawmakers — and the public — against government employees to thin their ranks and lower their benefits. This may be necessary for other reasons, but not because of the state’s pension problems.
The problem is what is called the unfunded liability. 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.
The funding ratio rose to almost 80 percent in 2007 before the recession wiped out investment gains.
Because of this continuing shortfall, a constitutional amendment was passed in 1995 requiring the state to 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.
One bright spot — the fund earned more than $1 billion in the last six months.
Still, the current unfunded liability is more than $4 billion.
According to an analysis completed last 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. This is important because there will be numerous proposals to change the system, such as raising the retirement age, switching to Social Security or making the plan like a 401(k). There may be good reasons for such changes, but they will do nothing to reduce the unfunded liability.
To continue to make those unfunded liability payments, cuts will have to be made elsewhere in the budget, which will pit school funding, road maintenance, health care and myriad other things the state does against the requirement to pay down the pension liability.
There are no easy choices.