Public pension crisis will complicate next budget

by Rep. Mike Celli

When the new Legislature begins work in January, the most important mission is coming up with a state budget for the next two years. Legislators have known since last spring that writing the budget would be an unpleasant undertaking, because it will require major cuts from current spending levels. Revenues are roughly $1 billion lower than a few years ago, and the federal “stimulus” money that partially filled the gap is running out.

What few people anticipated, however, was a bombshell from the public pension system, known officially as the Maine Public Employees Retirement System, or MainePERS for short. In July, the system managers announced that they will need $916 million in the next budget, roughly $226 million more than expected. The root of the problem is the “unfunded actuarial liability” (UAL) in the accounts that pay pensions to retired teachers and state workers. The $4.4 billion shortfall, which was announced in mid-summer, stunned government officials and legislators on the Appropriations Committee. Worse, the biennial payments to the retirement system will only grow much larger in the future.

Considering the daunting magnitude of the problem, some sort of changes look inevitable. Bills already submitted for the next Legislature could affect the retirement income of the roughly 76,000 plan participants, including those already retired and those still active.

How did we get into such a predicament? Most of the blame goes to politics and irresponsible government. Throughout the 1970s and ‘80s and into the ‘90s, public sector unions lobbied to enlarge the size of their pensions to compensate for salaries that were, at the time, relatively low. Their allies in the Legislature changed the laws to “enhance” the pension payouts, but then neglected to fully fund them. The cost was simply pushed into the future, leaving somebody else to deal with the fallout. A couple of years ago, the unfunded liability stood at $3 billion, but with large investment losses in the stock market decline of 2008 and 2009, the shortfall has jumped to some $4.4 billion. The funds depend on investment income for 60 percent of their total intake, and when investments turn sour, the taxpayers of Maine are forced to cover the gap.

Maine is not alone in this crisis. Public pensions have suddenly become front-page news from coast to coast. The recession has laid bare a harsh truth: states have made retirement promises they no longer can afford without savaging schools, Medicaid, roadwork and other critical functions.

Nationwide, the combined unfunded liability in state public pension funds is estimated at $3 trillion. So serious is the situation that the New York Times ran an article on August 6 entitled “Battle Looms over Huge Costs of Public Pensions.” The story discusses a “class war coming to the world of government pensions,” pitting pensioned teachers and state workers against the taxpayers who have to pay for those retirement checks.

The $916 million for fiscal years 2012 and 2013 will include approximately $210 million to cover “normal” pension costs, which represent the state’s routine monthly contribution of 5.5 percent of payroll. (State employees contribute 7.65 percent of their incomes to the trust fund, a percentage fixed by law.)

The big financial nut is the $706 million in mandatory payments towards the UAL, an increase of more than $220 million from the amount paid in the current budget.
An amendment to the Maine Constitution passed in 1995 mandates that the UAL be paid in full by 2028. A back-loaded amortization schedule sets the amounts required to retire the debt. With the UAL’s increase from $3 billion to $4.4 billion, the state’s biennial payments have surged sharply. From $706 million in the next budget, the amount hits $772 million in the 2014-2015 budget, then goes to $848 million in the following biennium. The payments explode upward in the “out years,” reaching $1.4 billion in the 2027-2028 budget cycle.

Taxpayers will end up paying $8.9 billion to retire the $4.4 billion debt, because the trust funds must be paid not just the principal they are owed but also the investment income they would have earned if they had been fully funded all along. To mitigate the financial stress, State Rep. Rich Cebra (R-Naples) has submitted a bill to suspend for six years the annual cost-of-living adjustments paid to retired teachers and state workers. His bill also would increase the employee contribution rate from 7.65 percent of income to 8.65 percent, also for six years. That would bring in an approximately $108 million in additional dollars over six years. The hope is that the trust funds’ investment income returns to normal levels as the economy rebounds, which would automatically lower the UAL and the state payments required to cover it.

Teachers and state workers count on their retirement system, and as legislators we want to make sure it’s there for them when they need it. But there is a limit to how much the state and the taxpayers can afford.

State Rep. Michael Celli (R-Brewer) serves on the State and Local Government Committee

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