GBC’s Fry: Pension funding challenges loom for state, local governments

Don Fry Commentary on WYPR

Baltimore City and Maryland are among governments across the U.S. facing declining pension fund assets and escalating costs.

Baltimore City’s fire and police pension funds suffered recession-driven investment losses of more than 38 percent during the last two years, prompting city leaders to seek ways to reduce the $166 million city contribution needed next year to fully fund pension costs.

Maryland’s state government pension assets suffered losses of 27 percent during the last two years. Last year, Maryland’s $1 billion contribution to its pension plans for teachers and state employees comprised 7 percent of the state’s entire General Fund budget. The combined plans’ future liabilities are now only 64 percent funded – down from 101 percent funding eight years ago.

Even more problematic are Maryland’s “pay-as-you-go” retiree health care plans, which are only 1.1 percent funded. At least 20 other states are in worse shape, studies show.

How did government retirement plan funding in Maryland and elsewhere deteriorate to this point?

The recession has certainly played a major role. But it is not the sole reason. Maryland’s pension funding ratio had been slipping before the recession when Maryland, like many states, deferred funding future pension liabilities in order to pay for more immediate programs and services. Baltimore City did the same.

Though state and local government retirement plans aren’t required to have high funding ratios, new accounting standards require governments to show the plans’ liabilities on their balance sheets. And bond rating agencies are watching closely.

How will governments close retirement liability gaps? A post-recession rebound would help, but won’t erase funding deficits any time soon. Options include increasing employee and government contributions, adjusting benefits and putting more investment experts on pension boards. Or, government could emulate the private sector and replace traditional pensions with 401(k) plans.

But one thing is certain. The era of kicking the government retirement-funding can down the road is definitely coming to an end.

For the Regional Business Report, this is Don Fry, President and CEO of the Greater Baltimore Committee, for 88.1 WYPR, your NPR news station.

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