Or is the problem exaggerated for political purposes? Our crack analytical team (consisting of me and a mug of tea) dove into the  ”Report on Pension Costs to the Legislature of the State of Maine” to find out.

First, let me say I don’t know the ins and outs of every line of Maine’s budget but the report linked above succinctly lays out the expected cost of our public pension system in a way that non-P.hd’s can understand. I hope that this commentary can bring some light to a confusing situation.

That being said, if you are the expert and anything in this post seems inaccurate please let me know.

What is the UAL?

Politicians are arguing about the UAL. Newspapers are writing about it. But what is it, exactly?

UAL is short for Unfunded Actuarial Liability. The UAL is what the pension fight is about. Conservatives argue that this liability, currently $4.3 billion or so, is bankrupting the state. The state was supposed to make contributions to our public pension system years ago but didn’t- the UAL is us playing “catch-up” on the pension fund.

Technically the UAL is not a debt, but it can be thought of as a debt in many ways. The reason it is not a debt is because it is very fluid. It is a prediction of future costs to the pension system based on expert assumptions of how many people will be in the system and what the costs breakdown will be. It is not a “debt,” however, because the liabilities and assets change. For instance, if people drawing pensions lived ten years longer than actuaries believe, the “real” UAL could be higher than currently estimated. Likewise, if people do not live quite as long or draw fewer benefits than predicted (i.e. more teachers retire before qualifying for their entire pension) then the “real” UAL could be lower than currently estimated.

Furthermore, UAL payments are invested and markets change year to year. If stocks go up then the UAL goes down, and vice versa. The stock market fall of 2008-2009 had the effect of increasing the UAL.

A second distinction that must be made is that the UAL does not include current pension contributions. Each year, the state makes what it calls “normal” contributions to fund the pension for current employees based on current earnings. The “normal” costs are fully funded. The UAL is, in fact, entirely composed of contributions the state promised but did not make many years ago. Thus anything the Governor does to reduce the UAL is, in some way or another, backing down on promises made to state employees more than a decade ago. As the report states:

UAL Costs are Past Unpaid Costs The UAL is a current cost that is paid for past plan activity. For this reason it can also be viewed as a debt. While normal costs can be changed by changing plans because they are prospective, UAL costs have already been incurred, and are unpaid costs. They must be paid to retire the liabilities incurred regardless of what type of plan is implemented for future benefits.

The Maine Pension System is in lieu of Social Security

Another point that most people understand, but a few don’t, is that public employees receive a Maine pension in lieu of Social Security. Thus, what the Governor is doing to Maine employees and retirees is akin to the Federal government reducing Social Security payments to the public at large. He is reducing payments promised to people who, years ago, contributed to the plan under an understanding that their future benefits would at a certain level. Employees currently pay 7.65% of their salaries towards their pension plan, a higher rate than private employees pay into social security.

Employees contributing to the Maine pension system do not make contributions to Social Security and would not be eligible for Social Security unless they also worked another job. Even then, they are not allowed to “double-dip.” Employees who qualify for a Maine pension as well as Social Security usually have their Social Security checks significantly reduced.

The Maine pension system costs the state less than Social Security contributions would. Here is the chart in the report comparing normal costs of the Maine retirement system versus social security and 401(k) plans:

How generous is the Maine pension system?

The report states the following:

For a State/Teacher Plan member retiring at age 62 with 20 years of service and a $45,000 final average salary, this formula would result in an annual basic retirement benefit of:

20 X $45,000 X 2% = $18,000

$18,000 isn’t a whole lot of money, folks. If a retiree is living high on $18,000 a year, it is only because he or she planned ahead. She probably bought a house she could afford and paid off the mortgage. She probably stuck some more money away in other investments. Essentially, someone able to live off $18,000 probably made sacrifices and lived smartly but plainly. I really am saddened that we consider giving teachers $18,000 a year in retirement to be bankrupting our state but are willing to give tax cuts to the wealthy in the hope that they will turn around and, maybe, employ someone. The even sadder truth is that Governor LePage understands that we are not bankrupt or he wouldn’t have requested hundred of millions more dollars in his latest budget than was paid in the prior budget.

To the extent we have a budget crisis, it is simply a matter of the economy. Tax receipts are down; they will go back up as the economy improves and business picks up. LePage’s own budget assumes significant increases in tax receipts over the next few years. That is what will solve our budget deficit! It will not be solved by any overall reduction in spending by Governor LePage from last year’s level because there simply isn’t an overall reduction in LePage’s budget.

The UAL goes away in 2028

No matter what the Governor does, the UAL will go away after 2028. There will be no UAL payment in 2029. “Normal” contributions will continue to cover the current costs of the program and there will be no more unfunded liability.

The only issue is how big the UAL payments will be leading up to 2028. Maine, essentially, has a payment plan on this past “debt.” Paying more now reduces future payments.

How big are UAL payments?

The payment this year is $233 million. In current dollars, payments will steadily increase to $501 million in 2021 before beginning to decline. In 2028 the last payment would be $371 million, in current dollars. In 2029 there will be no UAL payment whether we make changes or not.

How do UAL payments compare to Maine’s budget?

To me, this question is where the rubber meets the road. Are UAL payments so large that they are pushing Maine into a budget crisis? To answer this question I decided to compare predicted UAL payments to the current size of the General Fund.

Let me get one thing clear: This is not an exact representation of how much of the General Fund is devoted to UAL payments. This is a simplified conceptual chart; it shows what UAL payments are compared to the size of the General Fund while ignoring that there are some revenues to the state and payments to the UAL that occur outside the General Fund.

To make this comparison I took numbers from the pension report and made my own graph. The amount of the total General Fund is based on LePage’s most recent $6.1 billion budget proposal.

As you can see, we are approaching a point where the UAL begins to “bulge.” We are talking about a lot of money- hundreds of millions of dollars, in fact. But is this a crisis in the context of the $6 billion total budget? Do the increase in costs you see in that chart ensure bankruptcy? I think not.

By the way, I want to note that whenever the LePage administration shows a chart about how terrible our pension problems are, it always, without fail, stops at 2021. Every time. Stopping the chart before the line starts do go down is the best way to push for drastic cuts because the 2021-2028 period sure makes the chart look a lot less scary. And they use future dollars because including inflation makes the line go up faster, rather than putting everything in current money. And finally, they like to argue that state workers are overpaid by comparing private workers as a whole, many of whom work in fields where no education or accreditation is required, to state workers who, as a whole, are far more likely to have student loans, degrees, and mandated licenses, all of which would mean higher pay in the private sector. The State of Maine does not operate Wal-marts, Starbucks, and sandwich shops, the likes of which drag the average private compensation package DOWN. Compare a teacher’s compensation package to an “average” that include jobs no one expects to have any benefits and, duh, OF COURSE the teacher’s package will come out higher than the average.

If you think the geniuses at the Maine Heritage Policy Center don’t know all this, you’re wrong. They are purposefully misleading and hope you are too busy to bother looking at the numbers. Oh, and they get paid six figures to do it. How does that compare to the “average?”

Three Options

How can the state deal with UAL payment increases? There are several options. The state could cut elsewhere, raise revenue, or cut benefits. Obviously the Governor wants to take the last option and cut benefits, applying money going towards current pension costs to the UAL instead.

But let us look at the first option, budget cuts, in which the state would just pay the UAL as it currently stands and take the money from other places in the budget. In the worst years, 2020-2023, the UAL payment would consume another 5% of the state budget as compared to today. After the 2023 budget these costs fall. Is this a crisis? I’d argue not. As Republicans like to say, this is simply the kind of budgeting issue millions of Americans have to deal with everyday at their kitchen tables.

Another option to solve the problem is to decrease costs. This is what LePage proposes. He wants teachers and state employees to contribute 2% more of their pay towards pensions. Teachers and state employees, as the report states, already contribute more of their pay towards retirement than private workers do towards Social Security: (7.65% versus 6.2%). LePage’s proposal would require employees pay nearly 10% of their pay to the retirement fund to pay off money promised by the state decades ago but never delivered, in order to receive benefits of under $20,000 a year in retirement. LePage also raises the retirement age by three years, to 65.

An important fact: Increasing employee contributions is not necessary to sustain current pension levels. The “normal” costs of the pension plan, which are current payments to fund liabilities created by current employment, are stable. The increased contributions would be applied towards the UAL which, as I’ve stated, was created decades ago when the state underfunded the pension fund. When the UAL is paid off in 2028, all that will remain would be normal costs and I somehow doubt Republicans plan to decrease employee contributions back to their prior level at that time.

The Dirty Word: Taxes

The third option, the option that dare-not-be-named, is to raise revenue to cover the increased costs. How much would taxes need to go up? Mainers probably remember a time not so long ago when the sales tax was 6% rather than 5%. It seemed to me that a good way to look at the size of this problem was to use the sales tax to put it in perspective.

What follows is just an estimate, but I think it is conservative. As we all know sales tax receipts have been down due to recession, but that is the number I’m using as a baseline. The real amount of money raised in a normal year would probably be higher. Here is the math:

Maine raised about $1.8 billion in sales taxes in the last biennium, according to budget documents posted online. The UAL contribution in LePages two-year budget is about $689 million. During the 2020-2021 biennium, when UAL costs are predicted to be at their worst, an additional $312 million is needed.

If Maine raises $1.8 billion at 5%, it could raise $2.16 billion at 6%. Yes, I know receipts might go down because some people would buy things elsewhere that they would have bought here if the tax rate were lower. But really, who makes that decision based on a 1% difference in sales tax? Very few people on very few purchases. I suspect any decrease would be more than offset by the likely improved economy of 2020 compared to current times and, in any case, I want to keep the math simple. I’m not an economist.

So about $360 million more could be raised with a 1% increase in sales tax. This covers the increased UAL payment and then some. And that is just for 2020-2021, when the problem is at its worst. Both before and after 2020-2021 the necessary tax increase would be less. And if Maine actually applied some extra revenue now, ahead of schedule, we could decrease future UAL payments.

Conclusion: A 1% raise in sales tax could probably pay down the UAL ahead of schedule or, if only done for a few years, reduce UAL payments to presumably more manageable levels close to the current payment.

This is a Problem, Not a Crisis!

I decided to look into the pension report because I was sick and tired of hearing people talk about a gigantic crisis without any facts to back it up.

But guess what: the problem isn’t as bad as Maine conservatives want us to believe. This problem isn’t going to bankrupt our state. If you are a tea partier, the worst that could possibily happen is a tax raise equivalent to a 1% sales tax increase. Would you hate that? Sure! Would it destroy our state? No! So stop saying we are “bankrupt.” That word has a meaning and it isn’t the meaning you are giving it.

Life would go on even if taxes rose slightly. People would continue to buy products and birds would continue to sing. It wouldn’t be the end of the world. As I’ve said, Maine taxes have been higher in the past and we did okay.

We are talking about policy. We are choosing between tax increases, reneging on past commitments to state employees, a slightly different prioritization of funding, or some combination of all three. None of these options will end the world. In my view the worst that will happen that we put all the burden on our “overpaid” teachers and end up with fewer, less qualified people joining the profession, but even I admit that life would generally go on no matter the outcome.

Can you, Maine conservative, please admit that as well? Let’s stop scaring people.

What do I think?

Which option do I favor? All three. I think everyone should contribute. Maine’s government should pay most of the money they failed to contribute in the last century and mostly keep promises made to teachers and other employees. The extra money should come from a mix of cuts and increased revenue. Some revenue will come from the improving economy. I’d also favor raising taxes slightly; for instance I’d support an increased sales tax of 0.5 – 1.0 %. A half percent increase, if applied soon to the UAL, would probably prevent large UAL payment increases in the future. A full percent could even pay it off ahead of schedule. We could all gain from such a plan, because paying off the UAL sooner would free up more money for, say, tax cuts, and give us a competitive advantage over states still paying off their unfunded pension liabilities beyond 2028. And despite being a flaming liberal, I support tax cuts below current levels when the UAL disappears in 2028.

I also think workers should make concessions, but that they should be included in that decision. Right now Gov. LePage is telling them what concessions they need to make. Why not start a conversation rather than issue an ultimatum? This is where unions are useful. They can go to their members and discuss the options. They can provide a single voice with which the Governor can negotiate, should he decide to take such an un-Tea Party-like approach and actually compromise. Everyone would go home happier.

In terms of specific cuts to benefits my best suggestion would be an increase in the retirement age. I don’t, however, think we should raise employees’ already higher-than-social-security contributions towards their pension. I strongly feel that state workers are not overpaid. $45,000 for an experienced teacher is not too much. In fact, I would be suspicious of the quality of a teacher that would agree to spend their entire life working for much less. Let’s face it, at some point even people that really like teaching will leave the profession if the pay is too low.

This isn’t a crisis, it is a problem. Problems are best solved through discussion. I hope Governor LePage is willing to discuss and modify rather than just demand. Frankly, if the economy were gangbusters right now I expect the same people would still be trying to cut teacher and public employee pay. The state of the budget doesn’t really matter. This is just a part of their ideology.

Let’s set aside ideology and solve the problem.

For the record, neither I nor anyone in my family are beneficiaries to any part of Maine’s public retirement system.

You know when politicians release stuff on Friday they don’t want anyone to look at it. Apparently LePage’s budget is something he would prefer we didn’t dive into, because it came out this afternoon.

Well, I don’t know the ins and outs of the Maine budget but the first thing I immediately did was compare it to the last budget.

The General Fund request is slightly larger than Baldacci’s last request. And according to LePage’s own summary it is 7.8% larger than the last actual General Fund budget.

The Tea Party’s new slogan: We promise to keep spending increases below 8%!

We’ll surely learn more about the actual line items in the budget as time goes on, so I’ll reserve judgment on that.

AMG’s LePage budget thread is oddly, oddly quiet as of 3:30 this afternoon. Must be double, triple, and quadruple checking their math.

Today Governor Paul LePage, Democrat, submitted his budget request to the Maine legislature. Reaction was swift from the legislature’s Republican leadership:

“I don’t know how the Governor thinks we can support a 7.8% increase in spending, given the state of the economy,” said Senate President Kevin Raye.

Senate Majority Leader Jon Courtney added, “Maine businesses can’t support another round of budget increases. We should take that 8% and give it back to the Maine people, who can use it to grow the economy and create jobs.”

Governor Page brushed off criticism from the opposition party. ”We’re spending the money goddammit,” he said. “Anyone who says different can kiss my butt.”

Maine Public Radio announced they will use a portion of their increased budget to invest in a fully stocked minibar, on the theory that the Governor would then grant them more interviews.