Friday, March 26, 2010

Rich Madaleno on Teacher Pensions

Over the past week, the Senate completed its work on the state budget for the fiscal year that starts July 1, 2010. The budget plan is now being deliberated by the House of Delegates. The plan adopted by the Senate includes $2 billion worth of cuts and transfers, including, as you know, a plan to revise the way the employer obligation for teacher pensions is funded beginning in Fiscal Year 2012. Under this plan, roughly one third of the obligation would be shifted to the counties. While this is a change in a longstanding policy, let me explain why I helped draft this compromise which will balance the needs of our county and our state.

As this point, most people are aware of the unprecedented impact the recession has had on our state's finances. Revenues are five percent lower this year than last year - easily the worst drop in revenues since the Depression. Even the state's current optimistic revenue projections – which anticipate a robust economic recovery happening sooner than what now seems likely – anticipate a gap of $2 billion, or 15% of planned expenditures, for each of the next four years.

During the next four years, state funding for teacher pensions will nearly double to $1.25 billion. That is a devastatingly large sum. That’s more than the entire amount the state will be spending for our public universities and colleges. In fact, that one expense will account for roughly one-quarter of our projected four year deficit.

Even if we were to raise taxes substantially – a political impossibility in Annapolis during the current political climate – we couldn’t cover these costs. We could raise the state sales tax by 1%, repeal the Glendening 10% income tax cuts, maintain the “millionaire’s tax,” and institute combined reporting for the corporate income tax - and we still wouldn’t have enough money to cover our forecast deficit.

Our current approach to spending is simply not sustainable.

For several years, some of my colleagues have been determined to change our approach to funding teacher pensions, and several proposals were floated again this year. Adoption of any one of them would have been disastrous for Montgomery County.

o The first would have transferred fully one half of the cost of pensions immediately - forcing the counties to instantly swallow $450 million in new costs, an untenable situation for any county including Montgomery.

o The second would have transferred to counties the responsibility of funding the pension contribution for all new hires and pay increases - a proposal that would have eventually shifted 100% of pension costs to the counties.

o The third proposal would have made the counties responsible for all contributions in excess of the FY07 salary base. While this option would have required a similar initial contribution from counties, costs to Montgomery County would balloon over time, placing severe, ongoing, and crippling limitations on county finances.

Some have argued that our county's delegation should refuse to accept any shifting of teacher retirement costs on to county governments. That sounds great, but unfortunately, recent history shows that this approach not only does not work, it has devastating results. During the much less painful 1992 recession, Montgomery County refused to accept any shifting of teacher retirement costs on to county governments. Not a single county legislator participated in crafting the final plan. Nor did any vote for it. But Montgomery County doesn’t control a majority of seats in the General Assembly – not even close. So against our county’s united opposition, the rest of the legislature and the governor simply ignored us: the state shifted the entire cost of social security as well as the pension cost for two years on to Montgomery County, effective immediately. Our county is still paying the price for taking what seemed to be a principled stand and not having a seat at the table.

It is essential for Montgomery County to have a seat at the table if we want to look after our interests. In fact, earlier this month, it became clear that the third of the above proposals – the one with severe negative long-term consequences for Montgomery County – had sufficient votes to pass this year. So I was determined to develop a counter-proposal that would reduce the unavoidable impact on Montgomery County.

The Senate Budget and Taxation Committee's proposed legislation, unlike the one in 1992, delays implementation of the cost-sharing by a year. It also phases the cost-sharing in gradually over three years, thus allowing time for counties to plan. In the end, the counties' contribution rate will be less than one-third of the total pension obligation. In addition, the county rate will adjust downward as the health of the pension trust fund improves. Under this plan, Montgomery County remains the largest beneficiary of state dollars for teacher pensions.

Sometimes as a legislator, one is faced with a series of unattractive choices. This pension plan passed the budget committee by a vote of 12 to 3. By my estimation, it would not have been responsible to sit back and watch a far worse deal pass by a vote of 11-4, with Montgomery County’s senators united – and almost alone – in their opposition. I did not want to see us get rolled again. On this one, I decided to engage in the hope of shaping a more favorable outcome for Montgomery County.

The Senate President commented that he did not anticipate the House passing the pension plan. I expect this issue to be assigned to study during the interim, and I hope it will serve as a "ceiling" for what a cost sharing approach might look like. I will continue to look at ways we can protect our commitment to a dignified retirement for teachers while balancing the competing and equally compelling needs of our state. Difficult choices lie ahead, and I hope my actions show that I am willing to take whatever means are necessary to ensure that Montgomery County contributes to the discussion and is not left on the sidelines holding the bag.

Richard S. Madaleno, Jr.