Martin O'Malley and Robert Ehrlich stay mum on massive pension bill

Wednesday, October 13, 2010

MARYLAND GOV. Martin O'Malley (D) and his Republican rival, former governor Robert L. Ehrlich Jr., have staged their first debate; several more are scheduled. They've each poured thousands of words into television ads, campaign appearances, speeches, interviews, and Twitter and Facebook postings. Yet with precious few exceptions -- a few sentences on Mr. Ehrlich's Web site -- neither has cared to publicly discuss the most daunting threat to Maryland's fiscal health: billions of dollars in pension and health-care bills coming due for retired teachers and former state employees, and no plan in place to pay them.

Nearly every state is grappling with major long-term challenges in keeping its promises -- often exorbitant -- to retired public-sector workers, but Maryland has dug itself a particularly deep hole. Having shortchanged -- for almost a decade -- its contributions to the pension plan that covers more than 100,000 former employees, the state faces unfunded pension liabilities of more than $18 billion and unfunded health-care obligations projected at $15 billion. That's $33 billion in bills coming due, a sum equal to an entire year of state spending. And no one knows where the money will come from.

The numbers reflect a sorry record of political avoidance, cowardice and pandering by decision-makers in Annapolis, often in thrall to public employee unions. Starting in 2003, for instance, lawmakers allowed the state to trim its annual payments -- a decision akin to withholding part of mortgage payments. The move, undertaken in the waning days of Democratic Gov. Parris N. Glendening's administration against the opposition of pension system officials, was a green light for fiscal irresponsibility.

Lawmakers proceeded to bulk up spending on schools and other popular programs through the mid- to late-2000s, while closing their eyes to unmet pension obligations that widened year after year. They compounded the damage in 2006 by increasing pension payouts to retired teachers and state workers, a "benefit enhancement" -- as the euphemism went -- that was retroactive to 1998 and added $1.8 billion to the state's liabilities over the next 25 years. Adding to the problem, the state's pension assets, invested mostly in equities, consistently underperformed the stock market.

That was the situation even before the economy imploded two years ago. Then, as stocks plummeted, so did the pension fund's balance sheet. With liabilities exceeding $50 billion, the fund now has little more than $31 billion in assets -- even after the market's partial recovery over the past 18 months. Against the $15 billion owed for health care and other benefits, the state has less than 1 percent on hand.

In a report this year, the Pew Center on the States -- working from older and less alarming figures -- concluded that Maryland is one of 19 states facing serious long-term problems. It is one of just eight that has made no real progress in restoring the health of its retiree benefit plan, the report said. The state's pension fund was fully funded in 2002; now assets are just 65 percent of liabilities.

Maryland officials rightly point out that the fund has been in dire straits before. In the past, it has been bailed out by a combination of legislative action and surging stock values. It is possible that a booming stock market may again rescue the pensions of tens of thousands of retirees. Then again, it may not; many forecasters are pessimistic about the market's long-term prospects. Rather than betting on unforeseeable stock prices, politicians must act to fix this mess.

A state commission has started looking into the problem and is set to make recommendations this year. It could start by urging lawmakers to enforce a measure of budgetary self-discipline by ending the lenient system that has permitted insufficient payments into the retirement system for nearly a decade. The legislature has acknowledged, in resolutions, that the system of partial payments must change. But that's not enough; it must require that full payments be phased in, perhaps over the course of a decade.

The state must also recalibrate its benefits for new employees to shift from a system of set payouts toward one stressing defined contributions, as most private-sector businesses have done. Some states have adopted hybrid systems that combine the two methods, or set somewhat higher retirement ages.

Other painful steps will have to be taken, probably including transferring part of the burden for retired teachers' pensions from the state to localities. State lawmakers shouldn't use this as a dodge simply to offload their own problems. But it makes no sense to perpetuate a system whereby localities can saddle the state with long-term debts that the local school boards negotiate in the form of teachers' contracts. If locally elected politicians want to raise benefits, they also must be on the hook for at least part of the payments. To do otherwise invites massive irresponsibility.

Any or all of these steps will be difficult and require leadership. That makes it all the more disturbing that Maryland's most prominent candidates are saying so little about them. Of the candidates for statewide office, the only one talking about the coming fiscal tsunami is the Republican nominee for state comptroller, William H. Campbell, a political neophyte with little name recognition or campaign money.

Mr. Ehrlich is perfectly aware of the problem, but he rarely discusses it publicly -- possibly because he was just as guilty of overseeing the ballooning pension deficit, when he was governor, as Mr. O'Malley has been. Mr. O'Malley, too, understands the scale of the dilemma and is just as quiet, perhaps because addressing it head-on might alarm public employee unions, a pillar of the Democratic base.

The result is that Maryland's unmet obligation to retirees has become the giant unmentionable of the 2010 campaign -- avoidable for now, perhaps, but not for long.

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