Maintaining a healthy public pension system



In the wake of the massive stock market decline of the Great Recession, Governor LePage and the Maine Legislature took steps to improve the financial condition of Maine’s public pension system. By imposing a cap and rate reduction of the cost-of-living adjustment for retired state employees and teachers, the system reduced the amount of the unfunded liability (the projected difference between the pension benefits that have accrued and the assets that have been set aside to pay for them) from $4.3 billion to $2.5 billion, a reduction of 41 percent. Since that time the long economic recovery has helped the pension fund investment managers earn double-digit returns in six of the past nine years. Nonetheless the State Employee and Teacher Pension system is still $2.9 billion below full funding.

In Maine, the state government and local school districts and their employees make contributions to the state retirement plan instead of Social Security. The pension trustees and management team have succeeded in boosting the funding ratio of Maine’s public pension to 82 percent, though we should be at 100 percent as well as lowering the investment return assumption to 6.75 percent even though 6.0 percent is more sensible.

Because state employees and teachers depend on the state system as their only defined-benefit, employer-sponsored retirement safety net, special attention from the Governor and Legislature is warranted with the specter of serious issues that will challenge achieving full funding of the plan going forward.

A dominant and immediate challenge is satisfying the constitutional requirement to fully pay off the unfunded legacy liability by July 1, 2028. The payment deadline looms ahead and will weigh on state budgets for the next nine years. The Legislature must not allow the desire to expand other government programs to crowd out funding for this primary obligation.

Also, we know that a significant number of current boomer-age state employees and teachers are eligible to retire and will continue to swell the ranks of long-lived retirees to whom benefits are promised.

Finally, considering the patterns of economic cycles, we are likely closer to the next recession than not. The state should subject the Maine Retirement System to a stress test simulating a mild recession as a tool to project the additional reserves required to offset potential future market losses and with that data in hand the Legislature should over contribute to the system now providing a cushion against the impact of future losses. A smart way to deploy one-time surplus revenue like that announced from the May 1, 2019, Revenue Forecasting Commission Report.

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