Thursday, November 05, 2009

Maryland’s Black Hole Gets Bigger

In March, we referred to the State Retirement and Pension System (SRPS) as “Maryland’s $10 Billion Black Hole.” Recent data proves we were too conservative: the black hole is now $17 billion.

The state’s latest Spending Affordability Briefing illustrates significant deterioration in the state’s already troubled defined benefit plan for its employees. In our earlier post, we showed how the plan was 101% funded as recently as FY 2000. But the state reduced its contribution rate from 100% of the level needed to maintain the plan’s funding ratio in FY 2002 down to 89% in FY 2008, resulting in a $10.7 billion unfunded liability.

And then the bottom of the market fell out.

In FY 2009, the collapse of the stock market reduced the actuarial value of the pension plan’s assets from $39.5 billion to $34.3 billion. At the same time, the plan’s liabilities were driven upward by a 2006 pension benefit increase, salary increases and beneficiary increases from $50.2 billion to $51.4 billion. The unfunded liability had soared from $10.7 billion to $17.1 billion in just one year. As of the end of FY 2009, the state could fund just 66.7% of its promised pension benefit to its employees.

How bad is that? Wilshire Consulting analyzed the performance of 323 defined benefit plans sponsored by S&P 500 companies in calendar year 2008. Wilshire found that they had a cumulative funding ratio of 80.6% - far better than Maryland’s ratio of 66.7%. And the state has an advantage in this comparison since its fiscal year ended on 6/30/09, a six-month interval during which the broad Wilshire 5000 stock index gained 5.0%.

The ever-growing black hole has serious consequences for the state budget. In order to keep the system from becoming even more insolvent, the state will have to increase its annual contribution amount from $994 million in FY 2009 to $1.201 billion in FY 2010 and $1.429 billion in FY 2011. That’s a 44% hike over just two years. The majority of that money is necessary to finance teacher pensions.

This is a grim financial reality and will no doubt fuel more calls to pass down pension costs to the counties. But that ignores a central fact: the state’s pension fund is in trouble because of decisions made by the state government on benefits, contribution rates and investment allocations. Making the counties pay for the state’s mistakes is patently unfair. But regardless of which level of government has to fix the mess, one or both of two groups will get hit at the end of the day: public employees or the rest of us.