Despite making required contributions, Maine's Pension Plan still considered endangered

Despite this good funding record, MainePERS was still considered endangered as of June 30, 2009, because its  asset-to-liability level is only 67.7%.   Put another way, the state had less than 68 cents to cover every dollar of benefits promised. The plan’s funding ratio has also been hurt by investment losses.

At that time MainePERS only had $8.3 billion of assets to cover the $12.3 billion of pension benefits promised.  Federal law considers a pension plan “endangered” when its funding ratio falls below 80 percent.

A great deal of this underfunding occurred before 1998 when elected officials promised pension benefits without setting money aside to fund these commitments.  Investment losses have also contributed to this underfunding.  In 1995 the state constitution was changed to end this practice in relation to the pension plan, but as mentioned below this practice continues today in relation to the retirees’ health care plans.

The schedule above also indicates that pension benefits promised equal more than 2 times current payroll.  Of course, all the amounts and percentages are based upon an assumed rate of return on investment of 7.5%.  If the plan assets make less than that rate of return, then the taxpayers will have to pay additional money to adequately fund the plan.

The increased money could be considerable if you take into account a U.S. Government Accountability Office study that indicated pension plans’ historical rates of return have only been 4.5%.

The schedule above also displays dismal percentages for the state’s OPEB plans.  These plans are for Other Post Employment Benefits, mostly retirees’ health care benefits.  As indicated very little money has been set aside to fund these benefits.  Less than 5 cents has been set aside for every dollar of benefits promised.  In dollar terms, only $117 million has been set aside to fund more than $2.4 billion of retirees’ health care benefits  promised.

Like the promise of pension benefits, the promise of retirees’ health care benefits has been used by elected officials to make the state budget appear balanced, while not including all of the compensation costs incurred during the budget period.  More than $2.4 billion of unfunded OPEB liability has been accumulated by using this deferred compensation scheme.  This liability was obscured until 2008 when the Governmental Accounting Standards Board started to require the disclose of this liability.

The state is now required to disclose this liability in the footnotes of its financial statements and to report an annual required contribution (ARC) on its income statement.  Unlike the pension plan, the state does not fund the OPEB’s annual required contribution.  In 2009 the state only contributed 56.6% of the annual required contribution.

If the state contributed the ARC each year, then the OPEB plans would be fully funded in 30 years. By not contributing the ARC, the unfunded liability continues to increase.

The Institute for Truth in Accounting believes a state budget is not truly balanced if the annual required contributions are not made into the state’s pension and OPEB plans.  Therefore in 2009 the state’s budget was out of balance by at least $62 million.