$300 million pension payment on chopping block to balance Md. budget

By Len Lazarick


Budget highlights coverMuch or all of an annual $300 million extra payment into Maryland’s pension system is on the chopping block as Senate budgeters seek to balance Gov. Martin O’Malley’s $39 billion budget at a voting session Friday.

The governor had already used $100 million from the extra pension payment promised teachers and state employees in 2011, when their contributions into the retirement system were increased and future benefits were cut. Those actions are saving the state more than $300 million a year.

Sen. Ed Kasemeyer, chairman of the Budget and Taxation Committee, confirmed Thursday that at least $250 million will be taken from the pension payment after official revenue estimates were reduced Thursday by a combined total of $238 million for both the current fiscal year and next year’s proposed budget.

The reduced revenue estimate comes on top of more than $100 million in unexpected spending known as deficiencies not accounted for in O’Malley’s budget.

 $428 million in cuts needed

Warren Deschenaux, the legislature’s top fiscal analyst, told the committee it probably needed to come up with $428 million in spending cuts to balance the budgets in fiscal 2014 and 2015.

The $300 million extra pension contribution is the largest single pot of money available for cuts. Kasemeyer pointed out that any reductions there would not affect current programs or state services.

The extra pension payment is on top of $1.9 billion being put into the retirement system as required by actuaries, Kasemeyer noted. Officials emphasize that no one’s pension benefits in the $41 billion fund are in danger.

The system paid out about $3 billion in pension benefits in fiscal 2013, but investment earnings and contributions from the state, employees and teachers were more than twice that amount.

Sen. Edward Kasemeyer

Sen. Edward Kasemeyer

State Treasurer Nancy Kopp and Comptroller Peter Franchot, the chair and vice chair of the State Retirement and Pension System, both testified last week that the extra $300 million in pension payment should not be touched.

Told that the Senate committee plans to cut even more of the payment, Franchot said, “That would be an enormous mistake.”

O’Malley had also proposed to make his $100 million cut in the pension payment permanent. That would delay 80% funding of the pension system by at least a year, and cost $1.76 billion down the line, Kopp said. The state would eventually need to make up the lost payments and the expected investment returns on those payments.

Committee not planning on permanent cut

Kasemeyer said the committee was not planning to make the cut in pension payments permanent. “We need to come up with some plan to get back to where we’re supposed to be,” at the $300 million level, Kasemeyer said.

Franchot, a former House Appropriations subcommittee chair, has put himself at odds with legislative leaders trying to cut O’Malley’s budget. At a hearing last Friday, he told delegates from two committees that they ought to “tie a ribbon” on the budget and ship it back to O’Malley for cuts.

Appropriations subcommittee chair John Bohanan chided Franchot for suggesting an impossible move, and for not suggesting where else in the budget the legislators might cut.

Among the possibilities are cost-of-living pay increases and step increases negotiated by state employees.

Bad options or worse options

Sen. David Brinkley

Sen. David Brinkley

“We’re faced with bad options or worse options,” said Sean Johnson, legislative director for the Maryland State Education Association, the major teachers union. The union does not want to see payments into the pension systems reduced, especially not permanently, but it also does not want state aid to county school systems reduced.

Responding to Thursday’s write down of revenues, Senate Republican leader David Brinkley said in an email that the budget crunch was “self-inflicted by the General Assembly’s failure to constrain spending at the December meeting of the Spending Affordability Committee. The O’Malley-Brown Administration advocated for a spending affordability recommendation of 4% growth which was adopted by the committee.”

“The consequences of this latest revenue write-down could have been easily avoided if the O’Malley-Brown Administration had shown fiscal discipline in preparing the [fiscal 2015] budget instead of overspending hardworking Marylanders’ tax dollars.”

Budget didn’t have to grow as much

Sen. Roger Manno, a liberal Montgomery Democrat who serves on the budget committee, said in an interview Wednesday that the situation could have been avoided if O’Malley’s budget hadn’t grown so much.

“We don’t have to grow at 4%,” Manno said. “We could grow at 2%.”

“We’re doing fairly well as a state,” and his committee and the legislature have made “tough choices” in past years to raise taxes.

“We overestimated what revenues would be,” Manno said, but “those write-downs need not be as painful” if spending had been restrained.

“We need to make good on our prior commitments” on pension payments, he said, especially when the treasurer and comptroller plead for that “as the fiduciaries of this trust fund.”