Editor’s note: This is the fourth part in a multi-part series.
A widely-respected think tank calls the $4.2 billion that taxpayers owe to Maine’s retirement system a “ticking time bomb” that should dominate any discussion of the state’s finances.
The assessment by the nonpartisan Envision Maine is echoed by experts in state finances.
Robert A. G. Monks, the Cape Elizabeth resident who chaired two definitive studies of the retirement system, said the next governor will have to perform “triage” on the state’s competing needs and “dilute drastically” many programs to offset the pension expense.
Yet, most of the candidates for governor — one of whom will have to solve the problem — have treated it as a side issue, at best.
An examination of the official candidates’ web sites by The Maine Center for Public Interest Reporting reveals that not one candidate for governor has made the problem part of their platform.
Jobs, health care, education, energy, taxes, business regulation and other issues make the list of their formal policies — but not a problem that currently eats up 10 per cent of the state budget and is projected to take up as much as 20 percent while the next governor is in office.
The very areas the candidates cite as needing attention are some of the very same areas that will have to be neglected to pay for the pension liability.
“The cost of paying the unfunded liability,” states the Envision Maine study, “comes off the top of the state budget, crowding out spending for education, roads, support to towns, social services and the environment.”
Alan Caron, a co-author of the study, said, “Most of the candidates seem to acknowledge the mountain of debt that the state is carrying … but haven’t been pressed to answer what they intend to do.
“On the core question of whether candidates think we have to repay the pension as scheduled or not, we haven’t had an answer,” he said. “It’s stunning to me that this ticking time bomb is just sitting there while candidates are allowed to talk in generalities about deficits and change. This is a failure of not only the candidates but also the press.”
The group most directly affected by the problem is the 87,000 Maine adults who are covered by the plan — the current state employees and public school teachers and those retired from those jobs. Combined, this traditionally Democratic-voting group represents almost nine percent of the registered voters in the state, assuming they are all registered to vote.
The constitutional issue
Behind the scenes at the Statehouse, the most talked about solution to the problem is a change in the state constitution.
A 1995 constitutional amendment, which was approved 70-30 by voters, required the state pay off the debt by 2028. As the debt gets larger near the end of the period, it takes up more and more of the state’s budget.
The Maine Education Association and the Maine State Employees Association — the two groups that represent the current and future retirees — have suggested a new amendment that would replace the 1995 law and allow the state a much longer period to pay off the debt.
Their plan would pay off the $4.2 billion in 25 years from passage using a “rolling average” to determine the annual payment from the state. These payments would be lower than what is current required, thereby reducing the pressure on the state budget.
But this plan would also extend the payments at least eight years longer and would reduce the debt to a negligible amount, but not zero, according to a pension system analysis.
Envision Maine opposes that idea, as do others.
“We cannot continue to push the state’s bills onto future generations, as we’ve been doing for decades,” Caron said. “The voters gave the state 30 years to bring these bills current. The state then adopted a payment schedule based on optimistic investment returns, which now has us in a deep hole. It is hard to imagine that Maine people would have much sympathy for the argument that 30 years wasn’t enough time for the state to pay its pension obligations.”
David Wakelin, a former chairman of the retirement system, now represents the employees and teachers on the matter and argues the opposite view.
“These liabilities were built up over 40 or 50 years and there’s no critical reason they need to eliminated over the next 15 years,” he said, but admitted getting voters to pass a change in the constitution presents “some political hurdles.”
Following is a analysis of what five gubernatorial candidates have said — and not said — about the issue and, where available, their record on public pensions.
Cutler, one of three independents in the race, doesn’t list the pension problem in his “My Plan” white paper on his web site. But he did address the issue in interviews he has posted on his site.
Cutler told the Third Party and Independent Daily he is “concerned about the state’s indebtedness.”
While he acknowledged in an interview with the Center that the issue is not part of his formal platform, “I talk about it all the time, in every stump speech,” stressing that all the the state’s debts — including the pension debt — “threaten to crush us.”
“We can do something constitutionally about that, perhaps a different amortization schedule,” he said, adding that he would also consider examining current cost-of-living increases and extending the retirement age.
Cutler said he would support a change in the constitution only if the state employee’s union and teachers agree to a new and cheaper plan for new hires that would keep the liability from getting worse.
The Republican nominee’s platform talks of many issues — from the right to bear arms to welfare to jobs — but never the multi-billion-dollar debt.
Asked about the issue by the Sun-Journal, LePage indicated he’s in favor of changing the 2028 funding deadline, which would require approval of the legislature and the voters.
“I don’t see how we can get there in 18 years without cutting state government in half,” he said. “And I do not intend to cut state government in half.”
He said he would try to grandfather employees currently enrolled in the system while designing a new system for new hires.
Said LePage, “Can I promise that there won’t be modifications to the old system? No, I can’t. I would be an absolute idiot to make that kind of commitment.”
LePage referred questions about the issue to an adviser, Bruce Poliquin, one of the Republicans LePage beat in the June primary.
Poliquin, who has been an investment manager, said he and another defeated primary candidate, Sen. Peter Mills, R-Cornville, are working on a plan to solve the problem, but it won’t be completed until after the election.
He said they are awaiting the results of a study of the problem requested of the retirement system by two legislative committees.
He recognizes that the increasing payments to the system will “put pressure on education, welfare, roads, bridges — you name it.”
“Unless we deal with this,” Poliquin said, “Maine will not return to fiscal health.”
LePage has been mayor of Waterville for six years and was on the city council for four years. The city has two pension systems for its retirees. The non-union employees have a 401-k type plan since before LePage was on the council, according to city manager Mike Roy. Those plans by design do not incur debt.
The city’s police, fire and public works employees — all union members — are part of the Maine State Retirement System, but the municipal system is separate from the program that has the billion-dollar debt. Waterville’s pensions are part of a statewide plan that is 98 percent funded, according to the system.
The pension liability problem doesn’t make a showing anywhere in the veteran legislator’s platform.
In an email response to the Center’s questions, she wrote, “At forums and in interviews I have talked about making sure the state meets its responsibility to its workers and (I am) looking forward to a system that is more portable and more affordable.”
In April — before she won her party’s nomination– she told the Seacoast newspapers based in Portsmouth, N.H, “Maine has a very responsible course for paying that off over time. And as the economy grows, the pension fund will become more robust.”
That optimism is not shared by experts.
The plan Mitchell refers to assumes an annual return rate on the pension system’s investments of 7.75 percent. This year, stock market returns are up, but by less than 6 percent.
And even if the system makes the 7.75 percent return, that would still leave the debt to be paid off between now and 2028 at $4.2 billion.
Peter Leslie, an investment banker and the current chairman of the pension system trustees who has been reappointed to the board by Democratic Gov. John Baldacci, said, “Very few observers think that the public pension problems around the country have been solved by the recent improvements in stock markets. Investment results of the past ten years were so disappointing that Maine and most other pension systems, endowments and foundations fell far short of their investment return targets … It will take years of better than average returns to get even. With the economy still disappointing, this is likely to be a long haul.”
Mitchell said, “Growing the economy will improve the budget climate and help us deal with the UAL …The recession and the tepid recovery have hurt the rate of return the fund receives on its investments. When the recovery becomes more robust, the ROI will increase as well.”
Mitchell told the Sun-Journal she doesn’t favor amending the state constitution to extend the payback period.
“That would be too late, and I don’t think the people of Maine would be supportive,” she said.
‘Well-funded’ — or not?
She also said, “Maine is fairly well-funded compared to some other states.”
A chart provided by the Maine retirement system that uses the most recently available national data shows that more than half the states’ pensions are better funded than Maine’s. Maine’s pension is funded at 73.9 percent, while half the states are funded at 83.2 percent or better.
Mitchell’s response was: “Maine is doing better than some states. While Maine’s pension is funded at just under 74 percent, New Hampshire, for example, is funded at 58 percent, according to the Public Fund Survey. It is important to note that not every state has a unified retirement system, so we need to make sure we are comparing apples to apples.”
There were many key votes on the pension system when Mitchell was in the legislature. Perhaps the most momentous was the one approving the constitutional amendment, which not only set a deadline for paying off the debt but required any future benefits granted by the legislature be fully funded (in the past, many had not been).
The amendment passed the house on June 25, 1996, 127 to 8. Then-Rep. Mitchell, D-Vassalboro, was one of 16 members recorded as absent, according to House records.
“If I did not vote, it was because I was not present in the House,” she wrote. “I support the Constitutional amendment …”
Her “yes” vote on a budget bill in 1993 put significant cost controls on the pension, but also raised the expected rate of return on the system investments from 8 to 8.2 percent, a calculation that artificially improved the system’s funding status on paper.
Trustees chairman Leslie has written that was “a fictitious number,” based on politics, not sound investment strategy.
“It is easy to look back 18 years and suggest different actions.” Mitchell replied. “At the time we looked at the best information we had in front of us and cast the vote in the context of the entire budget.”
The independent candidate from Gorham makes no mention of the pension liability in his official platform, but an internet search shows he has addressed it in reply to questions posed by the Sun-Journal.
Moody said he believes residents would support amending the Constitution to eliminate the pension deadline, but it would be a divisive issue.
He also said, “I’d do an immediate investigation to find out who was managing these funds and how we ended up so deeply invested in the stock market for a pension plan … Instead of people becoming upset, they should be taking their energy and publicize how this happened. I’m not satisfied that they’ve done that.”
But an investigation may not be necessary — the retirement system’s web site (mainepers.org) shows multiple pages on the investments, including who manages the funds, the asset allocation and the historical performance.
Sandy Matheson, the executive director of the system, provided the Center with her “outreach” schedule since May 24, which shows she gave 36 briefings on the problem, including one to Moody.
Moody did not return two phone messages left at his headquarters.
Scott, one of the three independents in the race, doesn’t address the unfunded liability in his platform, but he does say that if elected he would ask state employees to work 32 hours per week, but while losing pay they would be “maintaining their current level of benefits, pension plan, vacation days, etc.”
He said his plan for a voluntary, 32-hour work week for public employees could be used to pay down the debt.
He believes the state should meet its obligation to state employees, but to stop hiring new employees under the old system “so we don’t compound the problem.”
He also said he believes the system’s board should not headed by a political appointee and all board members are confirmed by the legislature.
Disclosure: Robert A. G.Monks is a member of the Center’s advisory board.
John Christie is the publisher and senior reporter of The Maine Center for Public Interest Reporting, a nonpartisan and non-profit journalism organization based in Hallowell. Email: firstname.lastname@example.org. Web site: pinetreewatchdog.org.