Voters locked up pension ‘cookie jar’

 In 1995, fed up with the state's failure to adequately fund its pension system, critics came up with the ultimate solution. They proposed not only making it against the law not to fund the pensions but against the law of the land: the Maine Constitution.

Editor’s note: This is the third part in a multi-part series to be published between now and November about the state’s debt to teachers and state employees for their pensions and retiree health care.

 Groups representing the employees and teachers, backed by Democratic supporters, came up with a plan that ultimately became Article IX, section 18A-18B of the constitution.

On June 23, 1995, Rep. John Tuttle, D-Sanford, rose from the floor of the House and explained what the proposed amendment would do:

 “The Legislature is constantly saying that they are no longer going to balance the budget with gimmicks . . . ” he said. “Once again, I think we finally need to put a lock on the cookie jar and throw away the key.”

 The proposed amendment said all of the unfunded liability — the bill the state had let accrue over many decades — would have to paid off by 2028.

It also said the Legislature could not expand benefits without also appropriating the money to pay for them. Further, if there were losses in the pension system investments, they had to recovered within 10 years — no kicking them down the road indefinitely.

 The constitutional amendment was approved by the Legislature with strong support from both parties and independent Gov. Angus King. It went on the November ballot and was approved by 70 percent of the voters.

Under the new law and under the management of two veterans of the definitive studies of the pension system — past Chairman David Wakelin and current Chairman Peter Leslie — the system made major improvements in customer service and was put on track to meet the mandated payoff date of 2028.

Helped by favorable stock market returns, the system’s funding had gone as high as 79 percent 10 years ago, double where it was during its troubled period.

‘Excellent’ rating

A 2006 national study of state pension systems by the nonpartisan Pew Center on the States said, “Maine has done an excellent job funding its pension system and is in far better shape than it was in the mid-'90s.”

 All was going as planned, except one factor even a state constitution could not control: the stock market.

The pay-down schedule for the liability was based on averaging a 7.75 percent return on the system’s investments, about the same as other states, according to a national report.

 But the recession of the past few years and stock market losses meant the investments missed that mark.

 “We were positive to about 2.4 percent per year for the past 10 years, just a touch under inflation,” Leslie said,” but not nearly enough to meet our needed 7.75 percent.”

 That brought the funding level for the system down to about 60 percent, according to the system’s recent report to the Legislature.

Leslie has done an inflation-adjusted analysis of the U.S. stock market that shows that the last decade was worse even than the 1930s because in the '30s, market losses were tempered by deflation. Real growth in the '30s, he said, was up 20 percent, while the comparable number in the 2000s was down 24 percent.

 ‘Hammered’ by market

The system’s “portfolio was just hammered in this decade just finished,” Leslie said. “In my mind, that was the big story. I never expected America’s corporations to deliver to shareholders such a dismal negative result for 10 years.” ”

Because of the constitutional amendment, those stock market losses now have to be recovered in the next 10 years, plus the growth factor that was built into the plan.

 The money for those payments will come from future investments — assuming they at least meet the 7.75 percent return — the contributions from the teachers’ and employees’ paychecks and the state’s annual contribution.

But the state’s contribution may have to increase to the point that the pension expenditure could take up as much as 15 or 20 percent of the state budget. It already accounts for 10 percent, according to state budget records.

 And that may mean fewer dollars for other state programs.

Sen. Peter Mills, R-Cornville, a member of the most recent pension study commission, said the needs of the system will conflict with other programs supported by Democrats, the party that has dominated state government for 30 years.

“To a person of conservative disposition, what the left wing is doing to itself is, it gave away all those benefits to state employees and teachers,” he said. “Now these are eating up the social programs near and dear to them. And there’s no appetite for increasing taxes to deal with this sort of thing. “

 The political angle

 State Rep. Meredith Strang Burgess, R-Cumberland, writing on the House Republicans' Web site, asked, “How did we get into such a predicament? That's easy — politics. Throughout the 1960s and '70s and into the '80s, the teachers’ union and state employees’ union lobbied to expand the size of their pension without increasing the contributions. Their allies in the Legislature actually changed the laws to enlarge the pension payouts.”

 But another lawmaker, Rep. John Martin, D-Eagle Lake, who has been a legislator every year but two since 1965, sees its differently: “The last I checked, Democrats didn’t have much to say in the Legislature till 1974. The problems were all created by Republicans in the 1940s.”

 He said the Democrats made mistakes — “and I was part of it” — by going along with some of the moves made by Republican Gov. John McKernan in the '90s, such as “going into the fund in order to balance the budget.” During most of the McKernan administration, Martin was House speaker.

 McKernan did not respond to a request for an interview. While some criticize his efforts, others interviewed said he also saved the state money by pushing through reductions in the pension benefits.

Martin characterized improvements made when Democrats were the dominant party as, “We may have nickeled and dimed, but not very much. ... The reason we're in the situation we are now is the stock market.”

 Christopher Quint, executive director of the Maine State Employees Association, Local 989, said, “The issue here isn’t that we have too expensive of a system, that employees aren’t paying their fair share. The issue here is twofold, when you come to the UAL, when this thing was started back in the forties (and) they started paying out benefits in about 1950 before they actually had the money to pay the benefits."

 Past sins

 “And then over the years,” he said, “as things were added to it, or legislators took money from the system to maybe balance the budget here and there, you’re increasing the unfunded liability and then the perfect storm hits in 2008, and the market goes south."

The two studies cited most by legislators and experts were both headed up by Robert A.G. Monks of Cape Elizabeth, a nationally recognized authority on corporate governance and a top pension official in the Reagan administration.

 “We don’t have a case here of a bunch of greedy state employees,” Monks said. “What we have is a situation in which arrangements were made that were appropriate for the times they were made ... and we have an organization representing the employees who very intelligently understood that if times got tough the first thing people would do would be to repudiate this obligation.

 “That’s the problem of the state guaranteeing a given dollar result,” Monks said. “It means that whatever happens to the world or anything else, that dollar result has to be assured.”

 Leslie sums it up this way: “It was a complete mess. We cleaned it up and it’s run efficiently. Except it hasn’t paid for the sins of the past.”

Next: Is there any way around the looming budget crisis?

Note: Robert A.G. Monks is a member of the Maine Center for Public Interest Reporting's advisory board.

John Christie is publisher and senior reporter for the Maine Center for Public Interest Reporting, a non-partisan and nonprofit journalism organization based in Hallowell. His email is mainecenter@gmail.com. The center website is pinetreewatchdog.org.

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Comments

 's picture

Leave it to the dumbocrats

Leave it to the dumbocrats and their following to screw things up. Tax and spend. Then spend more on the useless dregs of society who do nothing but bleed the system with their dependance on welfare, food stamps, the sperm of a worthless slimebag and other government perks.

Jonathan Albrecht's picture

Another cost of republican economics

"But the recession of the past few years and stock market losses meant the investments missed that mark." The recession is the problem. The recession was caused by de-regulation and the Bush tax cuts.

 's picture

7.75% unreasonable

As a former fiinancial consultant with one of the biggest brokerages who got top returns for my clients and was asked to become an analyst, I can tell you 7.75% is an unreasonable expectation for continuous return or even average especially in a conservative portfolio as this fund would be required to be in. If they were able to sustain a 5% average return they would be doing excellent.

The out for this is controlling expenditures as cited in the article. Maine has been working on consollidating school administrative units, if they consollidated schools, they could maximize teacher and support staff utilization while improving educational opportunities which would simultaniously reduce educational costs to taxpayers and future demand on the retirement system eleviating much of the problem. There is so much to be gained from consolidatiting schools, our children can not wait. Every day we delay consolidation we sacrifice our children's education, another class graduates without the basic knowledge and skills of life, for the workforce and college. Isn't it time we stopped accepting, "we aren't ready," or "next year," or "we are working on it" from superintendents and school boards?

Outcomes are bad and getting worse instead of better. Ms Barrett and Dr. Ross of RSU 10 resently asked what to do, well consolidation of the high schools and middle schools in RSU 10 into one high school and one middle school and the elementary schools into two for next year for starters, ideally adding Telestar and placing one elementary school in the new facility in Peru and the other in Woodsock, Rumford if Telestar does not join. Get Buckfield transfered to Region 9 if they are to remain in RSU 10. If not have the state intercede to move Buckfield into Oxford Hills since it is they go there for technical it makes no sense for the split. But you have to consolidate the schools not just the administrative units.

 's picture

Peter Mills said: "...what

Peter Mills said: "...what the left wing is doing to itself is, it gave away all those benefits to state employees and teachers...”

This shows that Mills is completely ignorant of the system, at least as it applies to teachers. When I started teaching in Maine, teacher pensions were at about 60% of base, meaning that for a pension, teachers would receive 60% of their highest base (meaning not factoring benefits) salary. Now that's down to 35%. On a salary of $50,000, that means translates into a pension benefit of $17,500 per year. How does that translate into "cookie jar" or "golden parachute?" Combine that with the fact that teachers retiring now will receive almost nothing in insurance benefits and if they receive any social security payments, will have their teacher retirement salary reduced by that amount, it's not such a peachy deal as it's made out to be. Maybe if people like Meredith Strang-Burgess and Peter Mills actually knew, not in theory, but ACTUALLY KNEW from experience what it means to be a teacher-the education requirements, the continuing education and certification requirements, the teaching conditions, the lack of funding for materials and supplies, the disgraceful salaries (when I came to Maine from New Hampshire, I took an $8000 pay cut for the same position), and the lack of a secure retirement even though that was guranteed by contract and the state constitution, then maybe, just maybe, these ignorant pontificators would actually make some significant changes for the better.

 's picture

Don't count on it,

the teachers are a favorite whipping post for republicans, and they still blame Democrats when they created most of the problems.

Bob Stone's picture

When Do They Get to the Part About the Baldacci - Mitchell Re-Fi

You know, the part where they took short term money to pay for their reckless spending in one budget year and refinanced over years and years, and cost us millions in additional interest? Still waiting for that part of this sad, sad story.

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