Senate Budget and Taxation Plan Phases in Pension Shift

In addition to budget cuts and revenue increases, Governor O’Malley’s budget plan included a $239 million shift of teacher pension costs from the state budget to local governments.

The Senate Budget and taxation Committee recommends a more moderate, phased-in approach.

Under the Committee’s plan:

• The shift will phase-in over four years (fiscal years 2013 through 2016). The Governor’s plan implemented the shift all at once.
• The shift will only affect the payments for the retirement benefits earned by active employees (technically called “normal costs”). The state would still pay 100 percent of the accumulated unfunded retirement liability from previous years. The Governor’s plan called on the local governments to share the cost of unfunded liabilities as well as normal costs.
• Only school employees’ retirement payments are included in the shift. The Governor’s plan would also have shifted a share of library and community college employees’ pension costs.

The Committee’s plan is more reasonable and, while it will still have a significant impact on local budgets, it’s more gradual and sustainable than the Governor’s proposal.

It makes sense for the state and the local governments to share teacher retirement costs. Education finance experts have long recognized that 100 percent state funding of teacher retirement is one of the biggest “dis-equalizing” elements in our school finance system: state funding of teacher retirement costs tends to benefit wealthier school systems more than needier ones. The more affluent school systems can afford higher teacher salaries and lower student-teacher ratios, and full state funding of retirement costs exacerbates the resulting disparities.

However, this is a bad time to thrust this new cost onto local budgets all at once. While state revenues have begun to recover (slowly and unevenly) from their post-recession lows, local revenues are still dropping. That’s because of local governments’ reliance on property taxes, which take longer that income and sales taxes to respond to changes in the economy.

A sudden shift of almost a quarter billion dollars in costs to local budgets this year would have just shifted bad budget choices to local government leaders. Marylanders would have been hit by even more damaging cuts on locally-funded services.

Ultimately, Maryland needs to restore the wealth adjusted per-pupil inflation increases to local school aid that were enacted in a decade ago. The “Thornton” increases have started to reduce gaps in student achievement. Maryland will need to resume its investment in students to assure that we make further progress instead of losing the gains we have made.