Pension Sustainability: Maryland

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Does not meet
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Maryland results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MD-Pension-Sustainability-9

Analysis of Maryland's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Maryland's pension system for teachers is 65.4 percent funded and its amortization period varies—unfunded liabilities accrued prior to 2001 are amortized to the year 2020, and liabilities accrued after are amortized over a 25-year period. However, the state is not meeting the contribution requirements to meet these amortization points, and this means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 25 years to pay off its unfunded liabilities. The state's funding ratio does not meet conventional standards, its amortization period is not being met and the state's system is not financially sustainable according to actuarial benchmarks.

In addition, Maryland commits excessive resources toward its teachers' retirement system, especially in light of the fact that local districts and teachers must also contribute 6.2 percent to Social Security. The current employer contribution rate of 15.45 percent, which is paid by the state rather than local districts, is too high. The rate is established annually by the board of trustees based on an annual actuarial valuation. In order to meet the state's various amortization periods, the actuarial recommendation for Maryland's employer contribution level was 19.9 percent. However, that amount exceeded the state corridor funding statute, which limits the amount by which contribution rates can increase or decrease year to year, so the lower rate was set. The mandatory employee contribution rate varies based on teachers' dates of hire — teachers hired prior to July 1, 2011, contribute a rate of 5 percent and those hired on or after contribute 7 percent. Both are reasonable.

Citation

Recommendations for Maryland

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of less than 30 years to allow more protection during financial downturns. However, Maryland should consider ways to improve its funding level without raising the contributions of the state and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Maryland was helpful in providing NCTQ with facts that enhanced this analysis. The state maintains that the State Retirement and Pension System's amortization period does meet conventional standards, and the system is sustainable according to actuarial benchmarks. 

How we graded

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).