ANNAPOLIS, MD (January 21, 2010) – Governor Martin O’Malley outlined plans today to address Maryland’s unfunded pension and retirement liabilities and begin to put the public system on a path of sustainability. In introducing the FY 2012 budget proposal today, Governor O’Malley committed approximately $1.5 billion to the pension system next year, nearly $1 billion more than in FY 2003.
“Some of the toughest choices we face in this legislative session are the choices we make to fix our pension system,” said Governor O’Malley. “We owe it to our police officers, teachers and other hardworking state employees and we also owe it to our children and our taxpayers, to find a sustainable way forward that protects our commitments and maintains fiscal responsibility. This is a bill that we have to pay and all of us have a vested interest in finding the most fair and equitable way to keep our pension commitments.”
Governor O’Malley has outlined the basic principles on which pension reform is based:
(1) Continue to maintain a public system as a critical component of recruiting and retaining the best teachers.
(2) Improve the funding level in the State and Teacher retirement system.
(3) Reduce the pension and retirement liability, and therefore, we must ask current and future members of the system to contribute more to strengthen the system and preserve benefits.
(4) Identify certain milestones so as our economic circumstances change, we can revisit some of these reforms.
In each of his first four years, Governor O’Malley has submitted budgets that fully funded the State’s required pension contribution. But despite rapid increases in this contribution, the funded status of the pension system has dropped from 95% ten years ago to a project 59% next year.
The Governor’s proposed reforms will allow the state to reinvest more than $1 billion into the retirement system over the next six years. These reforms will achieve 80% funding of the pension system by FY 2023 and require bi-annuals reports assessing the financial health of the pension system, including recommendation for adjustments to state funding and/or future benefits.
Current employees and retirees:
The Governor’s proposed pension reform has no impact on current retirees and no impact on benefits already earned by active or former employees and teachers.
For benefits earned for service in FY 2012 and future years, active employees and teachers are offered a one-time choice between:
- Continue to pay 5% of salary towards retirement with adjusted benefit (1.5% benefit multiplier for each future year of service rather than current 1.8% benefit multiplier).
- Increase contribution to retirement from 5% to 7% of pay and continue to earn benefits at the current level (1.8% benefit multiplier for each future year of service).
Future employees and teachers:
New employees will automatically be required to contribute 7% of salary and receive a 1.5% benefit multiplier. In addition, year of benefit vesting will move from the current five years of service to ten years. Early retirement age will increase from the current 55 to 60, and the benefit will be calculated on the highest five years of salary rather than the highest three years. Finally, cost of living adjustments will be based on investment benchmarks.
In addition, the Governor announced plans to direct the appropriate Compensation Commissions to review pensions for elected officials for sustainability and fairness.
Health benefits:
Almost half of the unfunded liability associated with retiree health benefits relates to Maryland’s prescription drug benefit. For current retirees, the proposes reform plan establishes a state-run Medicare Part D-like plan that mirrors the federal program but fills the current coverage gap. In 2020, the plan transitions these retirees to Medicare Part D coverage in 2020 when the coverage gap is phased out.
For active employees, the proposed plan aligns co-pays with national trends and raises out-of-pocket caps from $700 to $1,000 for individuals and $1,500 for couples.
The current unfunded liability of retiree health insurance stands at $16 billion. After the proposed reforms, that figure drops by almost 50%.
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