Maryland’s $10 Billion Black Hole

Lost in the debate about teacher pensions is one central fact that deserves discussion: the State Retirement and Pension System (SRPS) of Maryland is seriously ill. That should concern state leaders, pension recipients and taxpayers alike.

SRPS is a defined benefit pension fund covering state employees, teachers, school support staff, law enforcement officers and some employees of counties and municipalities that participate in the system. Like any defined benefit fund, SRPS draws on a portfolio of assets (currently close to $40 billion) to meet a stream of long-term benefit obligations to retirees and beneficiaries. The ratio of the fund’s assets divided by the present value of its promised benefits to participants is called its “funding ratio.” The funding ratio is the fundamental measure of any defined benefit plan’s health. The closer it is to 100%, the more likely the plan will be able to cover its promised benefits. On the other hand, a low ratio means the plan may not be able to meet its benefits without significant new contributions. Private sector plans with low funding ratios are sometimes taken over by the Pension Benefit Guaranty Corporation, which often terminates them and pays out less-than-promised benefits.

As recently as 6/30/00, SRPS was 101.2% funded. But three things have changed since then to damage the pension plan’s health:

1. Increasing Numbers of Recipients
Since 2000, the number of recipients and beneficiaries has increased from 80,773 to 112,422 (up 39%).

2. Benefit Improvements in 2006
State workers and teachers won a major benefit increase in 2006 after complaining of inadequate benefits for years. That increase should have been funded, but...

3. Chronic Underfunding
Starting in FY 2003, the state and the other plan employers began contributing less than the full amount required to maintain the pension plan’s funding ratio. This practice hit bottom in FY 2007, when the employers owed $1.03 billion and only contributed $834 million, a bare 81% contribution percentage.

As a result of the above three factors, SRPS’s liabilities have increased by 66% while its assets have increased by just 29% since 2000. The funding ratio has fallen every year from 101.2% at 6/30/00 to 78.6% at 6/30/08. Most of the years between 2002 and 2006 were very good years for the stock market. Any well-run plan would have increased its funding ratio in those years, not decreased it. And now our informants tell us that the recent stock market crash has driven the funding ratio below 70%. The data below illustrates the sorry tale.


The state now faces a $10.7 billion unfunded pension liability – an amount sure to soar by next year’s annual report. While the dollar amount is high, the funding ratio is not that different from the early 1990s. The state was able to grow its way out of the problem with significant help from the national economic boom of that decade. But no one expects renewed boom times in the near future.

It is understandable that some in state government – like Senate President Mike Miller – would like to pass off this debacle to the counties. But since the state presided over this calamity, it is the state’s responsibility to fix it. Will the state cut benefits? Will it raise taxes? Will it shift spending from other areas to cover contribution increases? Will the state’s credit rating be affected? Or will Santa Claus come roaring back from the 1990s to bail out Annapolis?

It will take years to find out.

Update: We originally wrote this post a couple weeks ago. Yesterday, the Washington Post reported that Maryland's pension plan has lost an additional $10.3 billion in value since last July.