Pension Sustainability: Maryland

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

Comprehensive Annual Financial Report, Maryland State Retirement and Pension System, For the Year Ended June 30, 2010 http://www.sra.state.md.us/Agency/Downloads/CAFR/CAFR-2010.pdf

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.