Editorial: The Pension Cost Dilemma

Maryland Daily Record

by Daily Record Staff

Published: January 20th, 2011

Gov. Martin O’Malley acted wisely in deciding to address fundamental issues in the state pension system before making any move to shift teacher pension costs to local governments.

This was an especially tough call in a year when the state is facing a $1.6 billion budget deficit and there is pressure from all sides to cut costs and raise revenues. But it was the right call.

In all likelihood, any comprehensive plan to address Maryland’s fiscal problems will include a provision to shift some portion of the cost of teacher pensions to local governments — possibly as early as next year. The state has shouldered this immense financial burden — now approaching $1 billion annually — for years, but the financial reality of post-recession America will probably force this to change.

It should not change, however, before the state completes a top-to-bottom review of the already underfunded pension system and implements changes in funding and benefits that will put the system on a more realistic financial footing.

That must be done this year so that when it comes time to shift some of the burden to local governments, the system’s financial underpinning will be sound and the extent of the burden and its future impact will be clearly defined.

A state commission studying the pension system sent recommendations to the General Assembly last month on how to reduce retirement and health care costs while transferring more of the financial burden to Maryland’s employees, retirees and local governments.

One of those recommendations was that the counties assume part of the cost of teacher pensions. The model supported by the commission would have the counties and state split evenly the cost of teacher pensions, now paid fully by the state, and Social Security, now paid fully by the counties. The change would phase in a shift of about $250 million annually to the counties over at least three years, with wealthier jurisdictions paying a larger share.

The commission declined to make specific recommendations about what to do about pensions overall, recommending only that the legislature study how it could reduce benefits in the combined contribution plans.

In a recent speech to the Maryland Association of Counties, Gov. O’Malley seemed to reject the notion of moving from a defined benefit pension plan to a defined contribution plan such as a 401(k).

We think it would be a mistake to take this option off the table. We understand the political sensitivity of such a move, given the opposition of state employee unions, and the shift would have to be undertaken carefully to protect pension earnings already accrued.

But defined contribution plans are increasingly common in today’s world, especially in the private sector, and Maryland’s pension funding problem is dire. The system is now 65 percent funded, and the recommended funding level is 80 percent.

With a bottom line like that, we need every option we can get until we can agree on a plan to restore pension funding stability.

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