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Maryland governor proposes defined contribution option for new employees

Maryland Gov. Larry Hogan
Maryland Gov. Larry Hogan

Maryland Gov. Larry Hogan introduced legislation Monday to create an optional defined contribution retirement savings plan for new state employees aimed at addressing the unfunded liability of the $45.5 billion Maryland State Retirement & Pension System, Baltimore.

The proposed State Retirement Choice Act for the 21st Century Workforce legislation, if enacted, would set up an optional defined contribution plan for new state employees, but not teachers.

Employees could choose the existing defined benefit plan or the new DC offering, which would have 5% contributions each from employees and employers, and vesting after three years. Under the existing defined benefit system, state employees contributed 7% and employers contributed an average of 17.5% in 2016. The vesting period is 10 years.

The pension fund was 70.5% funded on June 30, the end of the latest fiscal year. Mr. Hogan made the annual required contribution in the last two years, plus two additional payments of $75 million to address the underfunding. The current estimated unfunded liability is $20 billion.

Mr. Hogan said in a statement that the proposed new structure “will safeguard pension contributions and create a long-term and stable structure that will meet the needs of retired, current and future state employees.” The current system “has chronically underperformed, earning 2.86% in 2015 and 1.16% in 2016, far less than the investment target of 7.55%,” the statement said.

Patrick Moran, president of AFSCME Council 3 in Baltimore, which represents Maryland state and higher education employees, disputed Mr. Hogan's claim that the change would make the pension system more secure. “This is all a ruse to defund the pension plan, to get the state out of its future obligations to retirees. The fact of the matter is that this would put the state pension system at risk,” Mr. Moran said in an interview.