Testimony on L.D. 513, RESOLUTION, Proposing an Amendment to the Constitution of Maine To More Equitably Fund the Liabilities of the Maine Public Employees Retirement System

We support the passage of the proposed constitutional amendment to address the current MEPERS cash flow challenges. These were caused by the combination of the Constitutional requirements to retire the unfunded pension liability and the unprecedented and unanticipated investment losses of late 2008 and 2009.

We are grateful to the legislature and people who approved amendments 18-A and 18-B to the constitution for honoring the commitment to state and teacher retirees and providing a logical path to assure the honoring of those commitments over the long-term. Just as the legislature and voters in 1961 and 1991 did not anticipate that further amendment would be necessary to best carry out those commitments, so the legislature and voters of 1995 can be excused for not anticipating the financial crash of 2008, the severity of which was not anticipated by the Federal Reserve Bank or many observers.

It is important to recognize that thanks to the actions in 1995 Maine’s pension system is far better off than those of many states. It was so recognized as a “solid performer” by the Pew Center for the States report issued in 2010 based on their calculations that Maine had achieved in fiscal 2008, immediately before the financial collapse, the 80% funding level recommended by the General Accounting Office. See http://www.pewcenteronthestates.org/uploadedFiles/wwwpewcenteronthestateso rg/Initiatives/R_and_D/Trillion_Dollar_Gap_factsheets_Maine.pdf

As we know now, that achievement was set back to about 66% in 2010. Some of that ground has already been made up by the investment recovery of the last nine months, after the MEPERS estimates of last June for the funding obligations under the currently mandated amortization schedule. What is important is NOT that particular funding schedule chosen somewhat arbitrarily sixteen years ago, but rather the principle that the state would pay benefits to those it had promised them.

This is NOT a debt like our debt to bondholders, immediate repayment of which would directly affect the state’s finances and ability to borrow for future capital projects. The unfunded pension obligation arose out of promises from the 1940s, 50s and 60s to our state workers and teachers. It is neither logical nor fair to say we are “keeping” that obligation by effectively reneging on it, lowering benefits for retirees now and in the future, and asking more from employees who already bear a higher proportion of the cost of their own benefits than is true for most private workers under the social security system.

The amendment before you offers you a sound way to BOTH keep the spirit of those commitments, pay our retirees what we promised, and create a new actuarially sound system for future payments to assure that benefits will always be there for retirees. The alternatives to this proposal use the Orwellian logic of “saving” pensions by cutting them. Several recent studies have demonstrated that state employees are NOT paid more than private workers for positions of comparable skill and education in the private sector, even when the value of pensions and health benefits are counted. Pensioners with an average current benefit of just over $18,000 a year should not be asked to pay for the budget that includes tax decreases for people with far more income and wealth.

It is not just for fairness and to meet our obligations that we should take this path to avoid the proposed unfair burdens on retirees and current employees. It is better for the fragile recovery of our state economy as a whole and therefore for everyone in the state for the largest employer in the state to keep money in payroll for both retirees and current employees. The quickest way to more stable fiscal health for the state is to get the economy growing again. That will not happen if we continue the path of taking money out of the hands of the majority and concentrating it in the hands of a very small minority. We can keep our commitments and smooth the financial effect of keeping them over many years through this constitutional amendment. We urge you to support it.

We appreciate that some have argued that in writing the budget you cannot assume passage of a proposed constitutional amendment, so even if the legislature approved this proposal you would have to proceed with the currently calculated state contribution estimate. I am personally puzzled at the argument that the legislature never balances a budget on contingencies – it seemed to me that it did just last year when it “counted” on federal Medicaid payments that had not yet been approved by Congress and does that many years when planned “savings initiatives” are relied upon with little assurance they will in fact produce the savings.

In any case this amendment would smooth the state’s obligations for many years into the future. For the balance of any savings you determine must come out of state and teacher compensation and benefit packages I urge the course described in the attached Pew Center for the States article about Vermont – in which negotiations between two administrations with the unions representing teachers and state employees reached results that met budget needs and were widely accepted as “fair.” (See http://www.stateline.org/live/details/story?contentId=559109) Maine’s circumstances are sufficiently different that the precise agreements would not meet our needs here; but it’s the process of negotiation that is most likely to lead to a better result than the one-sided approach represented in the Governor’s budget. 

Christopher St. John, MECEP Executive Director, testifying in front of the legislature’s appropriations committee in favor of LD 513, RESOLUTION, Proposing an Amendment to the Constitution of Maine To More Equitably Fund the Liabilities of the Maine Public Employees Retirement System