Report: Maryland, Virginia pension underfunding 'cause for serious concern'

Local,Maryland,Virginia,Hayley Peterson

Maryland has one of the worst-funded pension systems in the country, with its retirement and health liabilities growing to $71 billion, after lawmakers paid less into the system than what was owed for years, according to a new report.

The state's funding level ranked worse than just 11 other states in 2010, as Maryland had paid only 64 percent of what it owed to retirees in pension benefits, according to a newly released report from the Pew Center on the States. The system's liabilities increased $2 billion from the previous year.

By comparison, Virginia's pension funding level ranked in line with the national average, at 72 percent.

Economists say a healthy pension system should be about 80 percent funded.

Worst-funded pension systems
State Percent funded
Rhode Island 49
Illinois 45
Connecticut 53
Kentucky 54
Oklahoma 56
Louisiana 56
West Virginia 58
New Hampshire 59
Hawaii 61
Alaska 60
Kansas 62
Maryland 64
Mississippi 64

The Pew Center rated both Virginia and Maryland's stewardship of their pension systems as "cause for serious concern."

"These states cannot sit back and hope the stock market bails them out, especially as baby boomers retire," said David Draine, a senior researcher with the Pew Center. Critics say the states also are banking on projections for their investment returns that are much too rosy.

Maryland and Virginia also have been underpaying retiree health care benefits, with Maryland having paid just 1 percent of what it owed in retiree health costs in 2010, compared with the national average of 8 percent. Virginia's retiree health care costs were 26 percent funded, by comparison.

The gap between states' assets and their liabilities for public-sector retirement benefits grew by $1.38 trillion in fiscal 2010, up 9 percent from the previous year, according to the report. While most states have enough cash to cover benefits in the short term, many ultimately will need "higher contributions from taxpayers and employees, deep benefit cuts, and, in some cases, changes in how retirement plans are structured and benefits are distributed" to compensate for serial underfunding, the report said.

Lawmakers in Maryland and Virginia have begun to make some of those changes.

The Maryland General Assembly last year approved cuts to workers' pension and health benefits that included increasing contributions from current and future employees, reducing annual cost-of-living increases for retirees, and requiring higher co-payments for prescription drugs.

"Prior to the 2011 legislative session, [Gov. Martin O'Malley] acknowledged the problems with the state's pension system and implemented reforms to put the system on a path to sustainability," said O'Malley spokeswoman Raquel Guillory.

The reforms put Maryland on track to reach an 80 percent funding level within 10 years.

"We would be more interested in seeing this report five to 10 years from now," Guillory said.

Virginia lawmakers have adopted a hybrid plan for new employees that combines a pension plan with a cheaper 401(k) retirement plan. The General Assembly also reduced annual cost-of-living increases, increased employee contributions and limited early retirement benefits.

Draine said states must stop pushing retirement payments into the future. Both Maryland and Virginia began underfunding their pension and retiree healh benefit liabilities years before the recession hit.

"While the great recession certainly hurt," he said, "state lawmakers have been kicking the can down the road for a long time."

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