Thursday, December 5, 2013
Taxpayers take note. In accordance with the Maine Constitution, the Maine Public Employee Retirement System, known as Maine PERS, needs more money to meet its obligations to retired, current and future state employees and teachers -- a lot more money.
The state's public employees are in a defined benefit plan to which they contribute 7.65 percent of their paychecks, with taxpayers and investment income contributing the rest.
A defined benefit plan must pay pension retirement income as promised no matter what happens to the stock market or other investments. It's designed to be a no-risk proposition for employees, just like Social Security.
However, decisions and miscalculations about the state retirement fund made decades ago have now come back to haunt today's legislators and governor.
How much money are we talking about? Try billions of our Maine tax dollars over the next several years.
There are four basic ways a retirement plan becomes underfunded:
• The employer grants more benefits than it funds.
• The employer doesn't pay what it owes to fund retirement benefits.
• The assumptions about working or living longer are incorrect.
• The investments (stocks, bonds, real estate, etc.) that are expected to grow are lower than expectations.
Having recognized its errors, Maine state government has been doing a good job of paying its obligations with the force of a constitutional amendment passed in 1995 that set new ground rules for managing the retirement fund.
The constitution now requires that any additional benefit has to be funded 100 percent in the year it begins -- no more unfunded promises.
Also, the state has been making its full payments as required by law, and Maine PERS has made the adjustments to its assumptions about working and living longer. So far so good.
What no one could have predicted was the enormous drop in the fund's investments. Had Maine PERS been ultra-cautious and assumed the stock market was going to plummet, it would have been accused of over-collecting for an unforeseen crisis.
Taxpayers are chipping away at the liability with a $322 million payment this year, which includes normal funding requirements plus the installment payment for the unfunded debt.
Though the year-end calculations of the fund's assets are just being finalized, Maine PERS may need as much as $450 million next year. And unless the stock market takes off like a rocket, the following year's requirement could be $468 million or about 16 percent of the state's current annual budget.
What remedies are available to satisfy these obligations?
Legislators will have to take a much bigger piece of the pie from the state budget, redirecting money from other state services to make the debt payments. Or, they could raise taxes. In the end, someone is going to pay.
Legislators also may vote to increase the retirement age. In 1993, the retirement age for new state employees and those with fewer than 10 years of service increased from 60 to 62 years of age. That age is no longer realistic. Remember, Social Security began with the assumption that most people would die before they were eligible for benefits or would not live many years following retirement. That's not the case today for any typical retiree.
The last and least reasonable option would be to cut benefits for current retirees and those who have vested in the system.
Contrary to some perceptions, public employees do not have an overly generous retirement plan. For a person who has worked for 20 years and earned an average of $50,000 during their best three years of employment, their annual benefit will be $20,000, or $1,666 per month.
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