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

By John Christie

Senior Reporter

©Maine Center for Public Interest Reporting

How does a state of 1.3 million people end up $4.4 billion behind in its payments for just one state program?

It doesn’t pay its bills on time, makes promises without knowing the costs, loses money in the stock market and ignores repeated warnings that the debt is getting worse by the year.

The official name of the debt is the unfunded actuarial liability, and the program is the pension for Maine state employees and public school teachers.

The $4.4 billion represents $3,385 in debt for every man, woman and child in the state.

The debt is so large it eats up 10 percent of the state budget — more than the budget for the state colleges — and is projected to need an even larger portion of state revenue in coming years, perhaps as much as $1 out of every $5 Maine residents pay in state taxes.

The story of the pension debt that many call a looming fiscal crisis is the story of how a government can create a fiscal mess for taxpayers by satisfying the needs of a politically significant group while pushing the costs into a future that has now arrived.

Few in the state are as knowledgeable about the Maine pension system as Robert A.G. Monks, the chairman of two blue-ribbon studies of the system that warned of the ongoing problem.

The cost of pensions, said Monks, a Cape Elizabeth resident, “has been an afterthought” at the State House.

For decades, he said, the attitude had been, “Hey, it’s someone else’s liability — it’s not going to come up in our session.”

Instead, starting in the late 1940s and right up until the mid-90s, with a few exceptions, legislators and governors from both parties expanded and improved the pension benefits, often without an accurate estimate of the costs or a plan to pay them.

As Alan Caron, whose nonpartisan think tank Envision Maine is about to release a report called “Reinventing Maine Government,” said: “The art of politics is giving things — not taking things away.”

The “giving” started as early as 1913, when the Legislature granted veteran teachers an annual pension of $250. And until 1943, governors had the right to grant pensions to individual state employees on their own.

In 1943, the Legislature granted pensions to all longtime state employees who worked until they were 65. Even then, the pension board’s trustees were concerned about the future costs of putting that many people into a system that neither the state nor the employees had contributed to up to that point.

That’s why those trustees — 67 years ago — recommended that the state put an amount aside each year to pay for the pensions. If the Legislature and governors did that, the trustees estimated the debt would be “completely paid off over a period of about 30 years.”

Those 30 years came and went in 1973. The debt had not only not been paid off — it was more than $200 million.

The current projected date for paying off the liability is 2028.

Perhaps the most important year in the history of the pension system was 1947, when the Legislature took on the responsibility to pay pensions of public school teachers across the state.

A year later, the trustees reported to the Legislature that with the addition of the teachers, the membership in the pension system went from 5,000 to 12,000, a 140 percent increase — without a matching amount of new assets.

The assets did not match the liability because the teachers until then had never contributed to the pension system. They have since then, but those early debts rolled over and over along with other failures to fully fund the system. In the early 1990s, Maine’s pension funding was the third worst in the country.

One longtime legislator and former state financial officer, Sawin Millett, R-Waterford, recalled: “The state took on the liability for the teachers (pension) without receiving any assets. It was a generosity thing … also, no one was doing any actuarial work that would assess the future costs, so they didn’t see the problem we’d have down the line.”

That problem — the accumulated liability — was aggravated numerous times because the state improved benefits without putting aside enough money to pay for them, according to the studies.

In 1973, for example, the Legislature made seven changes to the pension, including lowering the number of years of services required for full retirement from 30 to 25.

In 1978, the trustees stated that the system was borrowing from the pension assets of state employees and the recently-hired teachers to help pay for the cost of taking on the teachers and other losses.

“The accumulated borrowings for the old system retirement allowance account amounted to $105,881,897 on June 30, 1978,” the trustees wrote.

In 1988, the “Monks One” study brought to light that state employees and teachers were often retiring well before age 65 — but the pension’s projections were based on employees working until they were 65. That drove up the costs because employees stopped contributing to the system earlier and started collecting from it sooner.

The Monks One research found that Maine’s system was only 39 percent funded — meaning it had nowhere near enough money to pay all future benefits. The average across the country for state systems at that time was 72 percent funding.

Despite all of these warnings, the records show the Legislature continued to improve pension benefits while failing to pay enough into the system.

David Wakelin, who was brought on the pension board after serving on the first Monks commission, recalled: “They promised benefits that were not adequately funded … they had an actuary who had assumptions that were not consistent with what was happening on the ground. No one was holding their feet to the fire.”

Ryan Low, who until July was Gov. John Baldacci’s chief financial officer, said that up until the mid-’90s, “my understanding is — I wasn’t around —  is the state would get the bill and sometimes they would make the full payment and sometimes they would make considerably less.”

The Monks Two study, done in 1994, concluded: Maine’s pension plan “is highly vulnerable to an absence of discipline in the legislative and executive processes of budgeting.”

A year later, Peter Leslie — a successful international investment banker in his private life — hit even harder in an essay for the Maine Center for Economic Policy.

Leslie, the current chair of the pension board, wrote that Maine has a “20 year history” of “tinkering” with the pension numbers for “political expediency.”

One example: During the budget crisis of the early ’90s, the Legislature and Gov. John McKernan mandated the pension board change its investment assumptions from an 8 percent return to 8.2 percent. Leslie wrote that while that “saved” $20 million on paper, “the number was fictitious” because it was based on politics not fiscal analysis.

During this same period, facing a budget hole of $1 billion-plus, McKernan and the Legislature reduced benefits, which saved money, but also borrowed from the retirement funds to help fill the budget hole.

By this point there was a growing consensus that something had to be done to force the state into some form of fiscal discipline.

Mary Anne Turowski, a longtime veteran of the state employee union and its current lobbyist, recalled state employees and teachers were increasingly worried.

“There was no certainty in the state’s capacity to continue to pay,” she said. “The attitude was, ‘We were robbed!’”

Next part: Put it in the constitution.

John Christie is publisher and senior reporter for the Maine Center for Public Interest Reporting, a non-partisan and nonprofit organization based in Hallowell. His e-mail is [email protected] The center website is pinetreewatchdog,org.

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