Senator Colburn Offers Starting Point for Pension Reform

In Annapolis, there has been much hand-wringing and gnashing of teeth by legislators over the $8 billion budget deficit created by Governor Martin O’Malley. More troubling, however, is O’Malley’s inaction towards resolving Maryland’s unfunded liabilities of $17 billion in pensions and $15 billion in retiree health care benefits.

Over the past four years, O’Malley has provided no leadership on this $32 billion problem. Why? State employee unions are opposed to even minimal solutions such as higher employee contributions or reduced out-year benefits. The Democrats cannot afford to alienate this crucial segment of their political base at a time when the governor and state legislators face re-election.

Maryland received the lowest grade of “serious concern” in a national study on pension reform prepared in 2009 by The Pew Center on the States. Since the study, Maryland’s position has worsened by a 12% drop in funded assets to liability ratio (79% funded in 2008 to 67% funded in 2009).

Governor Robert L. Ehrlich began funding the retiree health care liability during his term under the new government accounting standards for “OPEB” (Other Post Employee Benefits), but O’Malley has done little over the last four years in contributing to the $15 billion price tag. Now, less than 1% of the liability is funded.

Senator Richard Colburn offered a first step in stemming the tide of red ink at a hearing of the Pensions Subcommittee of the Senate Budget and Taxation Committee. Under the Colburn bill (SB 974), new state employees would be required to enter a “defined contribution” retirement plan instead of a “defined benefit” plan.

In his testimony, Colburn stated that many private employers switched to “defined contribution” plans over a decade ago. The benefit to employees under these plans is that vesting is immediate, member accounts are portable and members can decide which investment options best suit their needs. The state would see out-year liabilities decrease and annual savings under the bill.

Minority Leader Allan Kittleman also testified in favor of the bill. In praising Colburn’s leadership on this issue, Kittleman reiterated that the state's pension liability can no longer be ignored and creation of the “defined contribution” plan would be the logical first step towards reform. Kittleman stressed, “We need to assure current state employees that their retirement benefits are fully protected. If we don’t act to reform the system now, we cannot guarantee that the benefits will be there when current state employees retire.”

State employee unions testified in opposition to the pension reform bill sponsored by Colburn.