Upheaval in the financial markets decreased the value of the state employee pension plan by an estimated 25 percent since January, siphoning away more than $2.4 billion since the beginning of the year.
In the first two weeks of October alone, as financial turbulence quaked around the globe, the fund’s value plummeted between 8 percent and 11 percent to about $9.6 billion, according to recent estimates by the Legislature’s Office of Fiscal and Program Review.
Gail Drake Wright, executive director of the retirement system, said that despite the bad news, the plan’s beneficiaries need not worry; their benefits won’t be interrupted.
Still, calls to her office from pension recipients fretting about their financial futures have increased as many investment portfolios have suffered. With all that negativity, said Wright, it’s difficult to convince people that the system is designed to weather downturns.
“It doesn’t matter how many times I explain it,” she said. “There are still people calling me who are distressed because they think their benefits are going to decrease.”
The retirement system is set up as a defined benefit plan, meaning recipients by law will receive full payments no matter what happens to the plan’s earnings.
But then again, she said, this is a particularly bad downturn. If market turmoil continues for an extended period, the effects will fall on what the state and possibly future retirees contribute and receive. The retirement plan covers more than 75,000 teachers and state employees, 41,500 of whom are still working. Changes to what employees pay into the plan or what retirees and their families receive would require a vote of the Legislature.
“If history is any indication, once the current trouble in the financial markets subsides, investment returns should bounce back strongly and members of the system should not be impacted in any way,” reads the October newsletter of the Legislature’s fiscal office. “However, if market conditions continue on as they are for a significant period of time and earnings continue to erode, there will be a need in the future of additional funding, which could come in the form of increased employer contributions and/or, with a statutory change, increased employee contributions.”
In 1997, the Maine Constitution was changed to require the state to close a major funding gap in the system by 2028. As of June 30, that gap still stood at more than $3 billion, a number that increased by $124 million over the past year because of eroded earnings.
In fiscal year 2008, which ended June 30, the state paid 5.5 percent of its total payroll costs to fund the normal cost of the system and more than twice that, 12.3 percent, to fund the closure of the gap. In its latest budget proposal to the state, the retirement system estimated the state’s payments into the system will be $288 million in 2009 and $302 million in 2010.
By 2018, the state’s cost for the retirement system, assuming current long-term earning projections remain the same and there are no changes in benefits, will rise to $438 million.
Long-term projections for earnings on the retirement fund stand at 7.75 percent a year, which Wright said could still be realized if markets rebound as hoped. If they don’t, and long-term earning estimates fall by 1 percentage point, the state could end up paying a sum equal to 30 percent of its payroll to the retirement system in 2028.
(Statehouse News Service)
