Maryland’s bright credit rating has a darker underside

By Len Lazarick
Len@MarylandReporter.com

Maryland retained its near-sacred triple-A bond rating from the three rating New York City rating agencies Thursday.  The State House press corps generally treated it with a shrug, despite the pleadings for coverage.

No one, after all, had expected the rating houses to downgrade Maryland’s bonds, as they have in a few other states. A downgrade after 40 years as one of only seven top-rated states would have been huge news.

But underneath the good news this week was the troubling undercurrent of continuing budget deficits in coming years and the mounting deficit in state pensions and retiree health benefits. Neither problem is likely to be addressed during this election year

Two of the three rating agencies mentioned both problems, and raters had raised both subjects in the agency conference calls two weeks ago, Patricia Konrad, the head of debt management for the treasurer’s office, told a Senate committee.

Maryland’s good credit rating rests on four factors, according to Standard & Poor’s: a broad-based economy that has historically outperformed the national averages; high wealth and income; prudent fiscal management; and low debt, including a constitutional requirement that all bonds must mature in 15 years or less.

But S&P’s report cited both the continuing “structural imbalance” and the state’s “unfunded pension liability,” caused by both investment losses and “the lack of fully funding the annual required contribution.”

“If not addressed this would likely result in the continued weakening of the state’s pension system,” wrote S&P analysts Richard Marino and Robin Prunty.

The Pew Center for the States highlighted the problem on a national scale last week with a report called “Promises with a Price.” It details the trillion-dollar gap between what states have promised their retired employees and what the governments have stashed away for those benefits. http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/State_policy/pension_report.pdf

The Pew study is actually rosier than current conditions warrant, since it used 2006 figures, not those from 2009. In 2006, the future payments for retiree health benefits in Maryland was about $14.5 billion.

At that time, Maryland was one of 15 states where the cost of promised health benefits actually exceeded pensions liabilities, then about $7.6 billion. In three years, the situation has grown much worse.

Maryland’s pension liabilities are now at $17.5 billion, according to the state’s audited Comprehensive Annual Financial Report that came out last month. Retiree health benefits are now over $15 billion (p. 103). http://www.comp.state.md.us/finances/revenue/reports/cafr/cafr2009.pdf

That’s a total liability over the next 25 years equal to the size of this year’s budget.

What are state officials -- so proud of the triple-A bond rating -- doing about that huge future bill? Pretty much nothing, this year at least, when revenues are down.

In 2006, the legislature created a “Blue Ribbon Commission to Study Retiree Health Care Funding Options.” It was supposed to come up with final recommendations in December 2009. Instead, the House and Senate chairs of the commission have introduced bills this session to extend the life of the commission two years and require a final report in 2011.

A year ago, the blue ribbon commission did get detailed recommendations about what Maryland could do to reduce future liabilities. In general, legislative staff proposed a combination of raising employee contributions, increasing co-payments and reducing benefits, such as drug coverage.

Public employee unions screamed about the proposals. The commission delayed action on any of them.

In the past two weeks, Republican legislators have proposed reducing legislative pensions. They currently get two-thirds of a current legislative salary after serving 22 years in the General Assembly.

House and Senate Democrats have refused to even vote on the proposals, which would save an estimated $750,000 year.

But on the issue of pensions, Republicans don’t have much more credibility than their Democratic colleagues. In 2006, an election year, Republicans unanimously joined the Democrats in approving a substantial increase in pensions for state employees and teachers throughout Maryland that was strongly advocated by the public employee unions. http://mlis.state.md.us/2006rs/billfile/hb1737.htm

At the time, a fiscal analyst estimated that this pension boost – which also raised employee contributions – increased pension liabilities $1.9 billion over the next 25 years. In 2006, the state was flush with cash. Republican Gov. Bob Ehrlich signed the bill.

As the Pew Center study says in its executive summary: “In good times, feelings of legislative largess can create new retirement benefit policies that have costly long-term price tags.”

The long-term price tag for promises made by both Democrats and Republicans is $32 billion. Paying that off would cost at least another $1 billion a year that the state doesn’t have at the moment. Someday that money will have to be paid, or future benefits reduced. A triple A-bond rating doesn’t wipe this problem away

Analysis: Employee retirement costs loom in 2010

By Len Lazarick
Len@MarylandReporter.com

The new year starts, as usual, with unfinished business for state government.

By now, Gov. Martin O'Malley has likely decided how to balance the fiscal 2011 budget. The five-volume, 3,000-page spending plan is heading to the printer. We’ll find out in about two weeks how he plans to fill the $2 billion projected deficit.

Those decisions on how to keep agencies and programs running almost certainly will not include any solution to Maryland's long-term financial liabilities – largely pensions and retiree health benefits.

In November, we reported that taxpayer funding of the state pension system would have to go up $189 million in the coming year, from $1.2 billion to $1.4 billion. This comes after two straight years of investment losses.

The stock market has had made a good recovery, but over the next 30 years, the state has promised employees pensions that will cost $17 billion more than it has put aside.

Just six years ago, due to a run-up in stocks, Maryland’s retirement system had 90 percent of the money it needed to cover its long term liability. That high level of coverage allowed the state to reduce its contributions over the next five years.  

The state’s funding ratio — which measures how much the state has put aside compared to its estimated liability — was at 78 percent last year and it has now fallen to 65 percent. Legislative analyst Michael Rubenstein, in a report for the upcoming session, projected “the funding ratio will continue to approach 50 percent” and “the state will face a significant fiscal challenge to pay for retiree costs in the years ahead.” (Page 46)

The state’s commitment to pay the entire cost of teacher pensions represents nearly two-thirds of the annual contribution from taxpayer funds, or $919 million next year.

To catch up with rising liabilities for the future and to get back to where it was in 2003, the state would need to put in another $500 million each year. That’s money Maryland doesn’t have and is not likely to get from taxpayers in the next few years.

The same goes for the cost of health insurance for retirees. As we reported last week, Maryland would need to add more than 25 percent to its overall payroll cost if it is to catch up to its commitment to provide its retirees with health care, according to a report from the Center for State and Local Government Excellence.

Maryland’s liability of about $14.5 billion for retiree health care would require a $1.1 billion annual payment if the state were to fund the program in full.

Health insurance is the fastest-rising fringe benefit for state employees, legislative analysts have said. But a special blue ribbon commission set up two years ago to come with a solution is going to make no recommendations this year while lawmakers wait to see what comes out of health care legislation in Congress.

Solutions proposed by the legislative staff early last year involved either some reduction in health insurance benefits or increases in premiums for employees and retirees. State employee unions immediately jumped on the proposals, and no more has been heard of them since.

Pensions with defined benefits based on past earnings and generous health insurance for the retired are two benefits that have gradually disappeared from the private sector, except in unionized companies. State and local employees are not likely to give up these benefits without a major fight.

The governor and legislature face two more immediately pressing problems this year. They need to balance a state budget with flat revenues and the loss of federal stimulus dollars at the end of the year. They also need to get re-elected, and are not anxious to pick a fight with the largest unions in the state – those representing teachers and state employees.

Retiree health insurance would add 25 percent to state payroll costs

Maryland would need to add more than 25 percent to its overall payroll cost if it is to catch up to its commitment to provide its retirees with health care, according to a recent report on nationwide public retiree health care costs.  The report, from the Center for State and Local Government Excellence, says Maryland’s liability of about $14.5 billion for retiree health care would require a $1.1 billion annual payment if the state were to fund the program in full.