AUGUSTA — The Maine State Retirement System is undergoing its share of scrutiny as a nine-member task force discusses the future of the $9.3-billion retirement fund.

With more than 50,000 current participants and beneficiaries, and a mandate to fully fund the pension plan by 2028 to ensure its solvency, discussions for change are focusing on new state and teacher hires after January 2011.

Maine’s retirement system dates to 1933, predating the federal 1935 Social Securities Act. While some say the future of the state program comes in its dissolution and allowing state employees to pay into Social Security, others disagree. Increased funding from the state’s general fund, looming payments to cover unfunded liability, the uncertainty of the stock market and the collision of the three further necessitates review.

Sen. Peter Mills (R-Somerset County) sponsored the 2009 resolve creating the task force. With budget curtailments in place and a supplemental budget looming, the state faces a $244.5-million pension payment from its general fund in 2010.

That bill reflects not only annual payments, much like contributing payments or Social Security matches any employer would make for employees, but also a large portion of unfunded liability (see accompanying chart) mandated by a 1993 change in the state constitution. Based on recent data, the total unfunded liability for the state and teacher plans combined is approximately $3 billion. The teacher share is $1.96 billion and the state share is $1 billion.

“Because our municipal plans are fully funded, there is no unfunded liability payment,” Mills said of the need for review. “If a participating municipality were to close down and cease employing anyone under its pension system, there would be enough money in the trust to meet the accrued obligations of all participants, assuming that the assets of the trust could produce a 7.75 percent return, until every participant is dead.”

The fund for the state and teacher pensions is not so robust.

“If the state were to close down its pension system for both groups [teachers and state employees] and stop making payments, the trust fund, plus its earnings, could pay only about 70 percent of the benefits accrued.

“I don’t know how long the trust fund would last if we just kept paying full benefits until the fund is exhausted,” Mills said. “Obviously, older participants would get everything they are entitled to and the younger people would stop receiving benefits toward the end of their lives.”

That’s the scenario facing the task force as it wrestles with changing a 76-year-old system that has seen its share of market highs and lows.

Whether the group finds in favor of defined benefits, defined contributions, or a hybrid of the two, one thing is clear: Status quo is a difficult option to maintain.

Worst-case Scenario

Earlier this year the Maine State Public Employees Retirement System presented legislators an investment scenario that assumed the Dow Jones Industrial Average hovered at 8,000, or slightly above its low of January 2009. Those forecasts took the state’s $200 million average payment into the system to more than $500 million in a single year, in part due to a mandate to fully fund the plan by 2028.

The scenario was colored by the reality of the 27-percent loss on fund returns in fiscal year 2008 and a slow national economic recovery.

According to Sandra Matheson, the executive director of the Maine Public Employees Retirement System, Mills’ resolution seeks to unify health and pension plans under one umbrella for teachers and state employees and coordinate the benefits with Social Security in order to add “portability” from pensions and 401Ks earned in other careers.

“The idea is to link the two together for people so they know health and retirement benefits,” Matheson said.

If such a plan is implemented, it would only apply to people hired after January 2010, she said.

Funding the Fund

As an employer, the state makes annual contributions to pension plans held by state, teacher, legislative and judicial pension plans. One payment meets the normal costs of the plan and another helps chip away from the unfunded liability contained within the teacher and state employee funds.

“The normal cost payment is pretty steady and tends to be analogous to the Social Security tax rate,” Mills said. “[The unfunded] payment varies depending on what the actuaries tell us we need in order to get the unfunded liability totally paid off by July 1, 2028.”

Funding the retirement plan for state employees, excluding teachers, is $23,667,137 and $23,207,85 in each of the current biennial years, Department of Administrative and Financial Commissioner Ryan Low explained. Unfunded liability payments for the same group equal $31,999,313 in 2009-2010 and $32,905,189 in 2010-2011.

It’s the unfunded liability within the teacher’s fund that dwarves normal contributions. For instance, the $57 million regular payment is shadowed by the $130.7 million unfunded liability obligation in 2010.

Unfunded liability was created, in part, following a 1991 cut in teacher benefits when then-Governor John McKernan and the legislature balanced the budget by cutting retirement benefits. A constitutional amendment followed in 1993 requiring all state pensions to be fully funded. It was approved by voters during a 1995 referendum and requires paying off the current unfunded liability in 31 years and to prohibit the creation of new unfunded liabilities

Just how large is the state’s commitment to teacher retirement? In 2008, 6 percent of the state’s general fund expenditures were used to fund the state’s portion of the teachers retirement fund.

Some continue to suggest Social Security is a better option.

Low says the cost of such a move would likely be too high.

Opting for Social Security would raise the state’s share from 6.3 percent to more than 7.6 percent, Low said, and would still require additional payments to ensure the retirement fund will be fully funded for current participants.

“We’ve talked of switching to Social Security or other plans,” Commissioner Low said of the task fore. “The challenge, in the short term, is that they are more expensive. In this environment how can you come forward with a plan that has additional appropriations? I think that is the challenge the task force is having.”

The task force is comprised of representatives from all stakeholders of the retirement system. The retirement system, the Maine State Employees Association, the Maine State Employee Health Commission, Maine State Department of Administrative and Financial Services, the Maine Education Association and the Maine School Management Association all sit on the task force.

“The task force will submit its report to the Legislature, which will then decide what further action, if any, will be taken toward the creation of a new retirement plan for new state workers and teachers who start working on or after January 1, 2011,” Matheson said.

Who Participates in the Maine Public Retirement System?

The Maine Public Employees Retirement System manages the investment funds of some 50,264 employed teachers, state employees, legislators and municipal employees of towns that contract with the system for retirement planning, as well as 24,244 retirees.

Participants do not pay into Social Security while participating in the plan. All participants in a defined benefit plan, receive a set, monthly payment based on years of service, salary, and accrual rate. For example: 25 years X $36,000 X 2% = $18,000 per year or $1,500 per month.

State Employee/ Teacher Plan

This plan includes state employees, employees of the Community College System and statutorily created entities such as The Maine Educational Center for the Deaf and Hard of Hearing.

It includes:

• 14,000 active, contributing members.
• 8,100 retired state employees.
• Teacher members, including all public school teachers, administrators and various other positions that require certification or licensure by the Department of Education.
• 26,500 active, contributing members.
• 11,300 retired educators.

Judges’ Plan

This plan includes all active judges serving on or after Dec. 1, 1984.

It includes:

• 57 active, contributing members.
• 36 retired judges.

Legislators’ Plan

This plan includes all legislators in service on or after Dec. 3, 1986, and those in service prior to that date who opt into the plan.

It includes:

• 172 active, contributing members.
• 108 retired legislators.

Participating Local District Plan (PLD)

This plan includes employees of county, municipal, quasi-municipal or incorporated instrumentalities of the state who contract with the Maine Public Employees Retirement System to provide a retirement plan. Cities and towns, public libraries, housing authorities, regional school units and utility districts are examples of the PLD members.

The plan includes:

• 9,700 active, contributing members.
• 4,700 retired participating local district members.
• All active and retirement plan enrollments as of June 30, 2009.

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