By Len Lazarick, Len@MarylandReporter.com
The General Assembly’s Joint Pensions Committee unanimously recommended Wednesday abandoning a pension funding method that has allowed the state to pay hundreds of millions less each year into the state retirement system than actuaries said was needed.
The so-called “corridor method” was instituted 10 years ago when the system was almost fully funded. But over time, due to lower contributions and several years of poor investment returns, the $37 billion fund only covers 65% of the future liabilities for the 376,000 active and former state employees and teachers it covers.
There was virtually no discussion of this major change, which was aired more extensively at a Nov. 14 hearing. The change must be approved by the House and Senate budget committees on which all 16 members of the Joint Pensions Committee sit.
The corridor method will be phased out over 10 years. A key motive for the switch is that the corridor method, which saved the state money over its first 10 years, was going to begin requiring much larger contributions in the near future.
In the fiscal 2014 budget Gov. Martin O’Malley will submit in January, the state would have had to sock away $1.8 billion for retirement and more than 20% of payroll from 2016 onward. The switch from the corridor method will save the state $451 million over the next five years.
Pay me now or pay me later
Dean Kenderdine, executive director of the Maryland Retirement Agency, described the corridor method as “pay me now or pay me later” and those later payments were coming due.
The failure to fund the annual contribution recommended by actuaries has also been criticized by bond-rating agencies.
The change in funding method also expects that the board of the retirement system will reduce the assumed rate of investment return from 7.75% to 7.55% over the next four years.
That rate of return is considered unrealistic by some outside analysts, including Fitch Ratings. The state’s pension investments earned only 0.36% in fiscal 2012.