Maryland officials decided not to lower their expectations for the state's returns on its pension investments, even though economists say the projections are unrealistically rosy.
The Board of Trustees for the Maryland State Retirement and Pension System, which pays for state employee retirement benefits, has set its expected investment return at 7.75 percent, nearly twice the system's average annual return between 2000 and 2010, and much higher than the 5.5 percent rate that Moody's Investors Service is projecting for pension funds nationwide.
"In an environment characterized by incredibly low interest rates, that type of performance over time is effectively impossible," said Anirban Basu, chairman and CEO of Baltimore's Sage Policy Group.
|Md. keeps top bond rating|
|Maryland's sterling triple-A bond rating has been reaffirmed by the three national credit rating agencies, meaning the state can continue borrowing money at low interest rates, according to Maryland State Treasurer Nancy Kopp.|
|Maryland is one of eight states that has kept a triple-A bond rating through the recession.|
|Still, Moody's Investors Service assigned the state a negative credit outlook due to its dependency on the federal government, which had its credit rating downgraded last year.|
|The rating agencies also issued warnings about the state pension system's underfunding.|
|"The funded levels of Maryland's retirement system represent a credit challenge for the state," Moody's wrote. Standard & Poor's said the funding levels "continue to represent downside risk to the rating." - Hayley Peterson|
If returns don't meet expectations, taxpayers will be left holding the bag, he said.
The rate of return is an important factor in determining how much the state must pay into the pension system each year.
Dropping the rate by just 0.25 points to 7.5 percent would have added more than $12 million to state pension payments in fiscal 2014, which are expected to top $1.1 billion.
The system's actuarial advisers recommended that the Board of Trustees consider dropping the rate to 7.5 percent, but "the board thought it was more prudent to [maintain the rate], at least this year," said Michael Golden, spokesman for the pension system.
"In the end, the conclusion was that sticking at 7.75, based on 3 percent inflation, was clearly within the appropriate actuarial bounds, though at the higher end," said Maryland State Treasurer Nancy Kopp, chairwoman of the board. Lowering the rate to 7.55
percent "might be the next step" to pursue a year from now, she added.
Maryland's situation isn't unique. The average earnings projections for state pension systems nationwide is about 8 percent, while the average return over the last decade has been 5.7 percent, according to the National Association of State Retirement Administrators. Virginia sets its pension system's rate of return at 7 percent, which is 1.2 points higher than the system's average earnings between 2000 and 2010.
Basu says the Maryland board's decision to keep expectations level was aimed at preventing the state from having to shell out more money to the pension system next year.
"It's easier to kick the can down the road than to actually pick up the can and deal with it," he said. Maryland owes nearly $20 billion in pension benefits to current and future retirees. Virginia owes nearly $24 billion.
Contrary to Basu's assertion, Golden pointed out that in a separate decision this week, the board took action to change demographic assumptions, such as mortality rates and state employment numbers, which will require an additional $25 million in state pension contributions in fiscal 2014.