Issue Position: State Pensions

Issue Position

The Maryland State Retirement and Pension System has been horribly mismanaged. The State has made generous promises of future benefits to its employees, and the way things are going, the retirement and pension system is headed for bankruptcy. Unless the system is fixed, guess who is going to have to bail it out? The State's taxpayers, of course.

I am the President of the Calvert Institute for Policy Research. Over the past ten years, we have published repeated warnings that Maryland's retirement and pension system is rapidly heading downhill, but little has been done to stop the decline.

Part, but only part, of the problem is that the Trustees operate under the delusional assumption that the System's assets will achieve a 7.75% annual rate of return for the indefinite future. The actual rate of return over the course of the past decade has only been 5.4%. New York's Mayor Bloomberg, who knows something about investing, remarked recently, "If I can give you one piece of financial advice, if somebody offers you a guaranteed 7% on your money for the rest of your life, you take it and just make sure the guy's name is not Madoff." So the Trustees' fundamental assumptions underlying the management of the System's assets are badly flawed.

Secondly, the System is grossly underfunded in the first place. It is only 64% funded. It currently pays out to retired state employees over $210 million each month, more money than it receives in contributions and investment returns. Things are so bad that the Pew Center on the States issued a report in 2011 ranking Maryland 39th out of the 50 states.

Adding to the problem is that, to try to juice up the investment returns, the Trustees are making large investments in more risky investment vehicles known as "alternative investments". These include leveraged buyout funds and hedge funds. To pay for these more risky "alternative investments", the System is paying annual fees to Wall Street money managers totaling over $220 million annually. Unfortunately, available evidence shows that, despite these massive fees and despite the more risky investments, the returns achieved by the Maryland pension system have lagged behind other state pension systems.

Unless something is done, a terrible day of reckoning will arrive sooner rather than later, and Maryland taxpayers are going to find themselves on the hook for billions of dollars of pension payments to elderly retired state employees.

The bottom line: I plan to make as a top priority a thorough investigation of the management of the Maryland State Retirement and Pension System and will work with Democrats to craft the best solution to this incipient crisis.

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