Baltimore County Pension Change Will Cost $15 Million
Expert: "To be in denial, and say you’re ahead of the curve and that you’re in good shape and will stay in good shape is just ignoring reality."
UPDATE (9:10 a.m.)—The board that governs the pension plan for Baltimore County employees is lowering its official expectations on annual investments made by the retirement system.
The eight-member board Tuesday unanimously approved a decrease in the assumed annual investment earnings rate by more than six-tenths of a percent to 7.25 percent.
The rate is used to determine the county's level of funding for the nearly $2 billion pension system each year. The change means the county will have to come up with an additional $15 million in pension contributions beginning next July 1.
The board’s action Tuesday is the first time the rate has been changed since it was set in 1993, according to a report by the Baltimore County Auditor’s office earlier this year.
"It is obvious to me that this change has no negative impact on retirees," Baltimore County Police Major Joseph Zerhusen said in a statement. "This financial decision simply ensures that we set the expected performance of the pension system to better reflect a more realistic figure so that the system is fiscally sound for current and future retirees."
Zerhusen is chairman of the Baltimore County Employee Retirement System.
The county’s assumed annual investment earnings rate is lower than the 8 percent assumed by Baltimore City, and Anne Arundel, Howard Counties. The state assumes a rate of 7.75 percent.
Carroll County assumes a 7 percent rate.
Over the last 10 years, the county has seen a return of 4.259 percent—well below what the county expected. The county’s annual required contributions have “increased more than six-fold over the 12-year period from fiscal year 2002 to fiscal year 2013,” according to the Baltimore County Auditor.
In 2002, the county contributed $10 million to the retirement system compared to the nearly $73 million it will pay into the system this year.
Some financial experts said the county’s new rate may still be too high and the current pension system unsustainable.
Morris Segall, an adviser and senior Economist for Baltimore-based Sage Policy Group, said the unfunded pension liabilities of state and local governments like Baltimore County are not getting smaller. The stock market has shown a negative return on investments since 1999 and bonds and other investments continue to struggle as government work forces mature and retire.
The county auditor’s office reported earlier this year that the retirement fund is only 77 percent funded—down from 80 percent two years ago. In 2000, the retirement system was funded at nearly 112 percent.
The decreased funding comes at the same time that the number ratio of active to retired workers has dropped from more than 2 to 1 in 1993 to 1.4 to 1 as of June 2011.
“The money has to come from some where,” Segall said. “The county can’t pay for it all so there will likely have to be cuts to benefits or the county will have to demand larger contributions from employees.”
Segall said employee jobs could be on the line. So far, Baltimore County has avoided layoffs and furloughs that have happened in other county governments in Maryland and other states.
County officials routinely point out that they have avoided such draconian cuts at the same time they’ve made change to make the pension system more stable.
Segall said the moves merely delay the inevitable.
“To be in denial, and say you’re ahead of the curve and that you’re in good shape and will stay in good shape is just ignoring reality,” Segall said.
Segall said local governments are “running out of sofa cushions” to find ways to pay for defined benefit pension plans.
“It can’t go on to infinity,” Segall said, adding that the county will likely have to reduce its expectations again to below 7 percent. Such a move would require the county to find even more money to pay for it’s annual pension obligations.
Ellen Kobler, a spokeswoman for the county, said the county believes that the fund will recover over the long-term as the economy improves.
“We’re very confident with this analysis,” Kobler said. “You have to keep in mind that with government pensions you’re looking at the long-term outlook of 20 to 30 years and not the short-term outlook.”
It is not immediately clear how the county will absorb the additional pension costs.
“It will be figured into our future budget planning,” Kobler said.
In a statement, County Executive Kevin Kamenetz said the change was an important step in ongoing efforts to manage growing retirement costs.
"But we still have work to do," Kamenetz said in the email statement. "We have to focus on the cost of employee health care, and we need to do it now. Our employees and taxpayers know that we must have a pension and health care benefit structure that will be there when employees expect it, yet is affordable for present and future taxpayers. Anything less is unacceptable."
The change is not expected to have an effect on how much county employees contribute to the plan.
The change had been expected for some time.
County officials and members of the County Council earlier this year said the assumed earning rates on pension investments was too high.
The board did not lower the rate that determines the county's ability to give cost of living increases to retirees. Returns on pension system investments will have to exceed 7.85 percent before it can consider funding such an increase.