February 12, 2011

KAY RAND: State’s pension debt problem is neither a crisis, nor new


I am not nor will I ever be a state retiree, but on behalf of former colleagues who are active participants in the Maine Public Employees Retirement System, it’s important to add some calm to the recent concerns raised in connection with the system’s Unfunded Actuarial Liability (UAL).

There are three important things to understand about this problem:

• It’s not new; it’s been around at least since the 1970s.

• Recent governors and Legislatures have been addressing it in a responsible way, dramatically improving the situation.

• The recent shortfall in the fund has a lot to do with the stock market.

In 1992, the UAL was only 33 percent funded. In 2008, it was 74 percent funded. The percentage has fallen since 2008, not because of any action by the state, but because of the drastic fall in the stock market in late 2008 and 2009.

The Legislature will be asked to consider some reforms to the state employee and teacher pensions. None of those reforms will affect the UAL; it cannot be changed nor eliminated, only paid down. In fact, every state employee and teacher could be laid off and the UAL would not change. 

Understanding how the UAL was created is important. During the 1970s and 1980s, the Legislature enacted benefit improvements for teachers and state employees that applied retroactively to plan participants without funding them. To add insult to that injury, in 1992, when the state was facing a huge budget shortfall, the Legislature cut payments that were due to the retirement system.

This situation led to the passage of a constitutional amendment in 1995 that required the state employee and teacher pension system to be fully funded by 2028. Under the terms of that amendment, the unfunded liability was to be actuarially determined as of June 30, 1996. The now much-maligned term UAL was born.

The amendment also prohibited the creation of new unfunded liabilities by enacting any new retroactive benefit improvements without funding them.

This was a very smart move. The UAL now is on course to be retired before 2028. The debt schedule was reduced twice during the years of Angus King’s  administration and maintained by John Baldacci’s administration, saving taxpayers an estimated $1.9 billion.

Rating agencies took note of the state’s fiscally disciplined approach to retiring the pension fund’s UAL. In 2000, when Moody’s announced the state’s Aa2 bond rating, the positive pension funding trend was characterized this way: “The pension system’s funding status has benefited from recent year’s strength in the equity markets and the state’s serious financial commitment to improved funding. The most recent actuarial valuation indicates a 69 percent funding ratio, significantly improved from 41 percent in 1993.”

That’s not to belittle the challenges of maintaining the current debt schedule. The actuarial review reported in July 2010 revealed significant investment losses. It’s likely that much of that loss already has been earned back, but another actuarial valuation is not due until July 2012. If the Legislature decides to stick to the current debt retirement schedule, appropriators have to find more money to make up for the investment losses.

That increased appropriation is not caused by anything that current state employees or teachers have done. Promised benefits to current state employees and teachers who may work long enough to draw a pension are funded. As the employer, the state pays 5.5 percent of salary into the system, and each employee pays 7.65 percent. It  also should be noted that the state does not contribute on behalf of its employees into the Social Security system — unlike every other employer in Maine.

There are alternatives that could offset the need to appropriate more money in the next two-year budget to retire the UAL. One of the provisions in the 1995 constitutional amendment that makes little sense to most financial advisers is the requirement for all investment losses to be paid back over 10 years. Changing that would require voters to approve an amendment to the constitutional provision enacted in 1995.

The Legislature could order a new actuarial valuation before the July 2012 deadline to determine if the losses projected in 2010 have declined.

The unfunded liability of the public employee pension system is a problem, but it’s not a crisis; and it certainly shouldn’t become a political football. To make it so is a disservice to retired and active state employees and teachers who are participants in the retirement system, and to the public.



Kay Rand is former chief of staff for Maine independent Gov. Angus King.

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