Question 4 on the Nov. 7 ballot requests a technical change in how the Maine Public Employees Retirement System stewards the money that thousands of government employees, teachers and retirees count on for their senior years.
It’s deep in the weeds of how the system manages a fund worth billions of dollars to support retirement payments to all those people for decades into the future, but since the system’s parameters are defined in Article 9 of the Maine Constitution, it requires an amendment referendum.
“There was not an iota of opposition to this,” Sen. Roger Katz, R-Augusta, who sponsored the bill requesting the change this year in the Legislature, said. “It’s pretty basic.”
Here’s the question as it will appear on the ballot: “Do you favor amending the Constitution of Maine to reduce volatility in state pension funding requirements caused by the financial markets by increasing the length of time over which experience losses are amortized from 10 years to 20 years, in line with pension industry standards?”
What is the pension system?
It’s Maine’s retirement plan. It provides retirement benefits for nearly 40,000 active employees and more than 34,000 retirees. In fiscal year 2016, the system paid $728 million to government retirees, with an average annual payment of about $21,000 per person. Employees who pay into the pension system do not contribute to Social Security and don’t receive Social Security income when they retire.
It’s supported by payroll deductions for public employees, annual payments from the state’s General Fund and income from investments. The cost to the state fluctuates from year to year based on a number of factors, including the worth of the pool of money that is invested by the system. That worth has risen steadily from around $2.5 billion in 1991 to over $10 billion at the end of fiscal year 2016. Though the trend is upward, there are years when it loses value, such as after the dot.com bubble burst in 2002 and the financial market crash in 2008.
How does it affect the state budget?
When the value dips, the state generally pays more in the following years and when it increases, the state pays less. The state’s annual payments to the system, including normal costs plus payments to pay down debts from the past, have ranged from nearly $400 million in 1995 to around $320 million in 2017, but there have been ups and downs in between. Because of recent dips in investment returns, the state’s contribution jumped almost $18 million from 2016 to 2017 alone. Question 4 affects only the present and future costs of the retirement system, not the debts of the past which constitutionally must be paid off by 2031.
So what would the referendum do?
It doubles the length of time Maine has to replenish funds lost because of dips in the worth of Maine’s pension fund. Constitutional provisions require the system to recoup and pay off any losses in the fund’s value within 10 years. That provision was created in a 1995 referendum aimed at solving a crisis in the pension system, which in the 1980s was only 28 percent funded and worth less than $3 billion. That means it had only 28 percent of the funding it had promised to eventually pay in retirement benefits. The plan is now 80 percent funded and worth around $10 billion. This year’s referendum would extend the time the system is allowed to recoup losses from 10 to 20 years. That amortization period is recalculated on a rolling basis.
The math is complicated, but a longer amortization period will dampen big swings in what the state has to pay year after year. That’s because it would effectively smooth the impact of increases and decreases in the fund’s value over a longer period of time. Sandra Matheson, executive director of the retirement system, estimated that if the 20-year amortization period were already in place, the state’s contribution over the current two-year biennium could be as much as $79 million lower. Matheson estimated the change proposed in the November referendum could reduce the state’s liability by $55 million in the next biennium.
Matheson said the longer amortization period has the potential to cost more over time, but that stabilizing contributions in the short term would reduce year-to-year impacts on the state budget.
“Think of changing a 15-year mortgage to a 30-year mortgage,” she said. “You pay greater costs over time in exchange for a lower monthly payment.”
Part of the reason for the big swings is the growth in the size of the fund. When it was worth $2.5 billion, a 1 percent dip in performance, for example, had an impact of $25 million. Now that the fund is worth closer to $10 billion, a 1 percent fluctuation in market returns is worth $100 million.
“The bottom line is that 20 years is more in line with actuarial standards than 10 years,” Matheson said. “This holds even more for well-funded plans like the state/teacher plan where market volatility creates significantly greater losses and gains.”
Matheson said some retirement plans in the United States use amortization periods of up to 30 years but that 15 to 20 years is widely accepted as financially prudent for well-funded plans.
There is widespread support for the change. The Maine Education Association, the Maine State Employees Association and the Maine Association of Retirees all back the measure, which passed through the Legislature with only four votes against it.
Just a few decades ago, Maine’s retirement system was on the verge of collapse and an aggressive plan was put in place to save it. Now that the plan is better funded and on track to 100 percent funding, the argument in favor of Question 4 is that aggressive measures implemented during a crisis are no longer needed.
No organized opposition to the change has emerged.