THE RICHEST state in the union, as measured by household per capita income, Maryland has no shortage of resources with which to fund its state government. That is one reason, along with its generally prudent history of financial management, that the state enjoys a AAA bond rating from Wall Street. But like every other state, Maryland is governed by politicians who have an incentive to favor short-term demands over long-term interests. Measured by the ultimate test of long-range planning — their willingness fully to fund billions of dollars’ worth of retirement obligations for public employees — Maryland lawmakers’ performance has been mediocre at best and well below that of their peers in most other states.
Consider a recent study from JPMorgan Chase, the Wall Street firm that casts an unsentimental eye over the finances of state bond issuers on behalf of the investors who purchase such securities. The cold, hard truth about Maryland: It ranks no better than 43rd among the 50 states in terms of meeting its foreseeable pension obligations.
JPMorgan Chase assumed a 6 percent annual rate of return, more realistic than the roughly 7.5 percent assumption Maryland, like other states, uses. Then it calculated what percentage of its annual revenue Maryland currently spends to cover its share of unfunded retiree benefits over the next three decades — plus another unavoidable expense, net interest on its debt. The answer was 13 percent, two percentage points below the 15 percent that JPMorgan Chase considers optimal. To compensate for its past and continuing failures, and to fully fund these obligations, Maryland would have to boost the ratio to 20 percent, five points above the 15 percent benchmark. And that, in turn, would require a 7 percent increase in taxes, a 7 percent cut in spending, a doubling of employee contributions — or a combination of all three.
Yes, Maryland officials could always gamble on the markets to give them an 8.1 percent annual return, which is what JPMorgan Chase says it would take to free them from the painful but necessary choices they might otherwise have to make. Gov. Larry Hogan (R) and the Democratic-dominated General Assembly have opted to muddle through over the past four years, adding a total of $375 million in supplemental payments to state pensions instead of the $300 million per year called for in a 2011 pension reform law. The result is a state pension system that’s in better shape than it used to be but not nearly as stable as it could be, given Maryland’s underlying financial capabilities. Mr. Hogan and the General Assembly will return next year amid benign economic conditions for both the state and the country. The measures necessary to stabilize the state’s pensions are significant but eminently doable, both financially and politically. All it takes is a bit of foresight — and leadership. If not now, when?