Monday, March 16, 2009

Details on Big Daddy’s Teacher Pensions Bill Revealed

As we have previously chronicled, Senate President Mike Miller is determined to unload the obligation of paying for teacher pensions on Maryland’s counties. On February 6, Big Daddy introduced SB 710, a bill that would pass on those costs to the counties over a four-year period. The fiscal note is now in, and it shows that the counties would bear more than a billion dollars in costs from Miller’s proposal.

Currently, Maryland’s defined benefit plan, the State Retirement and Pension System (SRPS), covers over 350,000 active and former state employees, teachers, state police, judges, law enforcement officers, correctional officers and legislators. School employees, who are employed by state-chartered Boards of Education, have their pension costs covered by state contributions. Some local governments also cover their direct employees but contribute payments towards their pensions.

Miller would like counties to pay for the costs of funding their teachers’ pensions for two reasons. First, as the fiscal note states, only two other states (Texas and Kansas) cover all teacher pension costs on behalf of their counties out of 34 who responded to a survey for that information. Second, Miller contends that since pension benefits are tied to compensation, which is currently set by local school boards and funded by county governments, the counties are essentially passing on an unfunded mandate to the state. (This may be the first unfunded mandate your author has encountered that is actually passed upwards!)

The fiscal note shows the following distribution of costs to the counties in fiscal years 2011-2014 if Miller’s bill were adopted:

In terms of total costs, the counties would collectively owe $100.2 million in FY 2011, a figure that would rise to $452.7 million in FY 2014. Montgomery would owe the highest amounts ($88.9 million by FY 2014), followed by Prince George’s County ($67.4 million in FY 2014), Baltimore County ($52.3 million) and Baltimore City ($42.7 million).

But these figures need to be adjusted by population since pension costs depend partially on average salaries. Following is our calculation of per capita costs in each county for the four-year period using 2007 population estimates from the Census Bureau:

On a per capita basis, Howard County taxpayers would owe the most: $268.76 per resident over the FY 2011-2014 period. Following are Calvert County ($240.87), Montgomery County ($228.25), Charles County ($218.31) and Frederick County ($208.45). These counties possess many of the state’s best-performing schools, and under Miller’s bill, they would face the highest per capita liabilities for pensions. Big Daddy’s proposal thus contains a perverse incentive: counties can escape liability for pension obligations by shorting teacher compensation and passing pension costs onto other counties. Those counties that try to attract the best teachers would face added financial consequences from doing so.

Mike Miller has a point when he claims that counties have less incentive to control pension costs when they do not pay for them (although they certainly pay significant amounts in salaries). But Miller has conveniently left out a salient fact that operates in the opposite direction: the state’s retirement system is in poor financial condition because of prior decisions made by the state government.

We will investigate that issue tomorrow.