The Maryland state pension system is underfunded by over $19 billion as of 2012, according to a recent Maryland Public Policy Institute study. This is up from $11 billion in 2008, and reflects a combination of lower than necessary contributions to the state pension system and low investment returns. According to the report, only 11 of the 36 pension funds, encompassing state and county plans constituting the state system, are meeting at least the recommended 80% funding threshold. Overall, the Maryland state pension system is only 63.47% funded.
Funding levels range widely. The Maryland Transit Administration has the least funded plan (44.38%), with only $200 million in assets to back up $451 million in promises to public employees. Carroll County is the best funded of the system (93.51%), with $32.5 million in assets to fulfill $34.7 million in promises.
The report comes just months after the decision by the state pension board in June to reduce the assumed investment return from 7.75% to 7.55%. This decision was prompted by years of investment shortfalls, including a 2012 investment return of just 1%. As a result of the decision to reduce the unrealistic and unrealized rate of return, Maryland taxpayers can expect to see more of their tax dollars diverted from services and towards shoring up the underfunded pension system. Reportedly, in the next fiscal year Maryland will contribute $1.9 billion towards the state pension system. That is $200 million more than was contributed this year. However, the board also reduced the assumed inflation rate from 3% to 2.8%, a move that may understate the long-term liability and funding needs of the pension plan.
Complicating this is the possibility that even 7.55% is too high to sustain over 30 years. A September study by State Budget Solutions (SBS) suggests that assumed rate of returns be closer to actual US Treasury Bond yields. At the time of the SBS study, this was only 3.225%. When applied to state and municipal pension plans, this investment return yields significantly higher unfunded liabilities and thus, debt, that would dramatically increase the burden on state and municipal governments, taxpayers, and pension systems. Using the 3.225% investment return assumption, Maryland’s pension system would plummet to only 33% funded. Predictable consequences of using this 3.225% investment assumption include increases to annual required contributions by state and local governments (meaning, taxpayers) and would likely require public employees to contribute even more, significantly reducing their take home pay.
The growing body of research points to a need for substantial pension reforms in Maryland. In the coming years, taxpayers will be forced to pay more towards an underfunded pension system that may be anywhere from 33% funded to 63% funded. Failure to ensure long-term solvency threatens the retirement of public employees and the stability of state and municipal budgets.