Public pension debt looms as budget buster

Public pension debt looms as budget buster

By Rep. Kathy Chase

Maine faces a deepening crisis in its public pension system, as burgeoning costs threaten to squeeze out other government programs and vastly complicate the process of putting together the next state budget.

The root of the problem is the “unfunded actuarial liability” (UAL) in the accounts that pay pensions to retired teachers and state workers. The $4.4 billion shortfall, which was announced in July, has set off alarm bells in the State House. Budget experts are now pondering the impact of pension payment obligations that have soared in recent months and are scheduled to become even more unmanageable in the near future.

Considering the daunting magnitude of the problem, some sort of changes look inevitable. Bills already submitted for the next Legislature could affect the retirement income of the roughly 76,000 plan participants, including those already retired and those still active.

How did we get into such a predicament? Most of the blame goes to politics and irresponsible government. Throughout the 1970s and ‘80s and into the ‘90s, the unions representing teachers and state employees lobbied to enlarge the size of their pensions to compensate for salaries that were, at the time, relatively low. Their allies in the Legislature actually changed the laws to “enhance” the pension payouts, but then neglected to fully fund them. The cost was simply pushed into the future, leaving somebody else to deal with the fallout.

A couple of years ago, the unfunded liability stood at $3 billion, but with large investment losses in the stock market crash of 2008 and 2009, the shortfall has jumped to some $4.4 billion. The funds depend on investment income for 60 percent of their total intake. When investments turn sour, the taxpayers of Maine are forced to cover the gap.

Maine is not alone in this crisis. Public pensions have suddenly become front-page news from coast to coast. The explosive cost of retirement packages for state employees and teachers has emerged as a major issue at a time when state tax revenues are depressed and federal stimulus money is running out. The recession has laid bare a harsh truth: states have made retirement promises they no longer can afford without savaging schools, Medicaid, roadwork and other critical state functions.

Nationwide, the combined unfunded liability in public pension funds is estimated at between $1 trillion and $3 trillion. So serious is the situation that the New York Times ran an article on August 6 entitled “Battle Looms over Huge Costs of Public Pensions.” The story discusses a “class war coming to the world of government pensions,” pitting pensioned teachers and state workers against the taxpayers who have to pay for those retirement checks.

As the Times’ article says of the taxpaying public: “Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of these people will be paying higher taxes or getting fewer services as their states put more money aside to cover those pension checks.”

Here in Maine, the problem escalated from serious to critical in July. That’s when we learned that taxpayers will have to fork over $916 million in the next biennial budget, for fiscal years 2012 and 2013, to cover pension obligations. That will include approximately $210 million to cover “normal” pension costs, which represent the state’s routine monthly contribution of 5.5 percent of payroll. (State employees contribute 7.65 percent of their incomes to the trust fund, a percentage fixed by law.)

The big financial nut for the next budget is the $706 million in mandatory payments towards the UAL, an increase of more than $220 million from the amount paid in the current budget.

An amendment to the Maine Constitution passed in 1995 mandates that the UAL be paid in full by 2028. A back-loaded amortization schedule sets the amounts required to retire the debt. With the UAL’s increase from $3 billion to $4.4 billion, the state’s biennial payments have surged much higher. From $706 million in the next budget, the amount hits $772 million in the 2014-2015 budget, then goes to $848 million in the following biennium. The payments explode upward in the “out years,” reaching $1.4 billion in the 2027-2028 budget cycle.

Taxpayers will end up paying $8.9 billion to retire the $4.4 billion debt, because the trust funds must be paid not just the principal they are owed but also the investment income they would have earned if they had been fully funded all along.

Obviously, these payments will heavily impact a budget that stands at $5.5 billion for the current biennium. To mitigate the financial stress, State Rep. Rich Cebra (R-Naples) has submitted a bill to suspend for six years the annual cost-of-living adjustments paid to retired teachers and state workers. His bill also would increase the employee contribution rate from 7.65 percent of income to 8.65 percent, also for six years. The hope is that the trust funds’ investment income returns to normal levels as the economy rebounds from this seemingly endless recession. An investment recovery would automatically lower the UAL and the state payments required to cover it.

Teachers and state workers count on their retirement system, and as legislators we want to make sure it’s there for them when they need it. But there is a limit to how much the state and the taxpayers can afford.

State Rep. Kathy Chase (R-Wells) is the ranking Republican on the Maine Legislature’s Taxation Committee

”Restoring Honor Rally” in Washington DC

Last weekend I had the incredible experience of attending the ”Restoring Honor Rally” in Washington DC. Like many of the 500,000 plus people attending, I traveled by bus organized by local people who took the initiative to do it. There were several bus groups from Maine and ours was put together by Jeff Scully. That scenario was repeated by others across the country. We met people from Michigan, Arkansas, Washington, Arizona, Georgia, Rhode Island, New York, and other Mainers and saw buses from all over the USA.

If you have never been in a crowd of more than a half a million people before it is hard to imagine the enormity and logistics of moving that many from outside of Washington DC in to the Mall between the Lincoln Memorial and the Washington Monument—and having them all there by 10 a.m. on a Saturday. It was accomplished smoothly, simply due to the respectful attitude of those attending the rally. In the hour and a half wait --in lines that filled the train terminal and wound outside down the street --just to purchase the Metro Train tickets to get near the mall, people were polite, did not get angry and helped each other in the digital ticket process that few were familiar with. Our Metro Train was filled to capacity before the 4th of 10 stops to get to the nearest Mall exit, yet passengers joked about being packed in “like sardines in a can” and called out recommendations about the best stop to get off and how to get to the Mall.

On the Mall, families, groups of friends, military members, and individuals of all ages and ethnic background gathered on blankets or small folding chairs, sitting and eventually all standing as the crowd grew larger and the time for the Rally grew near. There were no protest signs-- no signs at all that I saw—only thousands of American flags and some State flags being waved. The only “chant” I heard the entire time was “U. S. A., U. S. A.!!!”

The Show itself, was as inspiring as the crowd watching it. As promised, it was not political, but American. A moving and stirring tribute to and reminder of where our Country came from, the ideals that brought us together , the recognition of the great minds that put it all together and the strength of conviction Americans have always held for freedom, faith, individual rights and love of country. Current military heroes were introduced, honored and their stories told. Soldiers past and present were thanked for their service and honored for their willingness to protect Americans. Medals were given to three people who best represented the ideals of Faith, Hope and Charity. Martin Luther King’s niece paid tribute to her uncle in recognition of the anniversary of his “I Have a Dream” speech given there at the Lincoln Memorial 47 years before and his honored position in American Civil Rights History.

The call to action for the rally was to bring attention to our country’s original vision and mission. A “reawakening” call to the ideals of freedom, protection of our families, individuals rights, unity among states, responsibility as a people, Faith, and most importantly- together we are Americans. In the darkest hours of our history Americans have proudly stood shoulder to shoulder for the good of our country. Saturday I felt as honored as anyone recognized on that stage to be “shoulder to shoulder” with 500,000 patriotic Americans who were there because they believed in our Forefathers’ mission and vision, did not hold back their faith, proudly saluted our flag and were respectful to each other. Luckily for all of us, I believe they represented only a “tip of the iceberg” of good Americans in our great Country.

Kathy Chase, Wells Maine