Third in a series by the Maine Center for Public Interest Reporting about the state’s debt to teachers and state employees for their pensions and retiree health care. Next: Is there any way around the looming budget crisis?

In 1995, fed up with the state’s failure to adequately fund its pension system, critics came up with the ultimate solution.

They proposed not only making it against the law not to fund the pensions, but against Maine’s law of the land: the state Constitution.

Groups representing the employees and teachers, backed by Democratic supporters, came up with a plan that ultimately became Article IX, Section 18A-18B of the Maine Constitution.

On June 23, 1995, Rep. John Tuttle, D-Sanford, rose from the floor of the House and explained in layman’s terms what the proposed amendment would do:

“The Legislature is constantly saying that they are no longer going to balance the budget with gimmicks …” Tuttle said. “Once again I think we finally need to put a lock on the cookie jar and throw away the key.”

The proposed amendment said all of the unfunded liability – the bill the state had let accrue over many decades – would have to paid off by 2028.

It also said the Legislature could not expand benefits without also appropriating the money to pay for them. Further, if there were losses in the pension system investments, they had to be recovered within 10 years – no kicking them down the road indefinitely.

The constitutional amendment was approved by the Legislature with strong support from both parties and independent Gov. Angus King. It went on the November ballot and was approved by 70 percent of the voters.

Under the new law and under the management of two veterans of the definitive studies of the pension system – past Chairman David Wakelin and current Chairman Peter Leslie – the system made major improvements in customer service and was put on track to meet the mandated payoff date of 2028.

Helped by favorable stock market returns, the system’s funding had gone as high as 79 percent 10 years ago, double where it was during its troubled period.

A 2006 national study of state pension systems by the non-partisan Pew Center on the States said, “Maine has done an excellent job funding its pension system and is in far better shape than it was in the mid-’90s.”

All was going as planned, except for  one factor even a state constitution could not control: the stock market.

Investments miss the mark

The pay-down schedule for the liability was based on averaging a 7.75 percent return on the system’s investments, about the same as other states, according to a national report.

But the recession of the past few years and stock market losses meant the investments missed that mark.

“We were positive to about 2.4 percent per year for the past 10 years, just a touch under inflation,” Leslie said, “but not nearly enough to meet our needed 7.75 percent.”

That brought the funding level for the system down to about 60 percent, according to the system’s recent report to the Legislature.

Leslie has done an inflation-adjusted analysis of the U.S. stock market that shows that the last decade was worse even than the 1930s, because in the ’30s market losses were tempered by deflation. Real growth in the ’30s, he said, was up 20 percent, while the comparable number in the first decade of this century was down 24 percent.

The system’s “portfolio was just hammered in this decade just finished,” Leslie said. “In my mind, that was the big story. I never expected America’s corporations to deliver to shareholders such a dismal, negative result for 10 years.”

What the recent poor returns mean for the state’s taxpayers is that – because of the 1995 constitutional amendment – those losses have to be recovered in the next 10 years, plus the growth that was already part of the plan.

The money for those payments will come from future investments (assuming they at least meet the 7.75 percent return): the contributions from the teachers’ and employees’ paychecks and the state’s annual contribution.

But the state’s contribution may have to increase to the point that the pension expenditure could take up as much as 15 or 20 percent of the state budget. It already accounts for 10 percent, according to state budget records.

And that may mean fewer dollars for other state programs.

Sen. Peter Mill, R-Cornville, a member of the most recent pension study commission, said the needs of the system will conflict with other programs supported by Democrats, the party that has dominated state government for 30 years.

“To a person of conservative disposition, what the left wing is doing to itself is, it gave away all those benefits to state employees and teachers,” he said. “Now these are eating up the social programs near and dear to them. And there’s no appetite for increasing taxes to deal with this sort of thing. “

The political angle

State Rep. Meredith Strang Burgess, R-Cumberland, writing on the House Republicans’ website, asked, “How did we get into such a predicament? That’s easy – politics. Throughout the 1960s and ’70s and into the ’80s, the teachers’ union and state employees’ union lobbied to expand the size of their pension without increasing the contributions. Their allies in the Legislature actually changed the laws to enlarge the pension payouts.”

But another lawmaker, Rep. John Martin, D-Eagle Lake, who has been a legislator every year but two since 1965, sees it differently:

“The last I checked, Democrats didn’t have much to say in the Legislature until 1974. The problems were all created by Republicans in the 1940s.”

He said the Democrats made mistakes – “and I was part of it” – by going along with some of the moves made by Republican Gov. John McKernan in the 1990s, such as “going into the fund in order to balance the budget.”

McKernan did not respond to a request for an interview. While some criticize his efforts, others interviewed said he also saved the state money by pushing through reductions in the pension benefits.

Martin characterized improvements made when Democrats were the dominant party as, “We may have nickeled and dimed, but not very much. … The reason we’re in the situation we are now is the stock market.”

Christopher Quint, executive director of the Maine State Employees Association, Local 989, said, “The issue here isn’t that we have too expensive of a system, that employees aren’t paying their fair share. The issue here is twofold … when this thing was started back in the ’40s (and) they started paying out benefits in about 1950 before they actually had the money to pay the benefits.

“And then over the years,” he continued, “as things were added to it, or legislators took money from the system to maybe balance the budget here and there, you’re increasing the unfunded liability and then the perfect storm hits in 2008, and the market goes south.

“So you factor those two things, we had the absolute perfect storm,” Quint said, “which is what we’re seeing right now.”

Haunted by past sins

The two studies cited most by legislators and experts were both headed up by Robert A. G. Monks of Cape Elizabeth, a nationally recognized authority on corporate governance and a top pension official in the Reagan administration.

“We don’t have a case here of a bunch of greedy state employees,” Monks said. “What we have is a situation in which arrangements were made that were appropriate for the times they were made … and we have an organization representing the employees who very intelligently understood that if times got tough the first thing people would do would be to repudiate this obligation.

“That’s the problem of the state guaranteeing a given dollar result,” Monks said. “It means that whatever happens to the world or anything else, that dollar result has to be assured.”

Leslie summed it up this way: “It was complete mess. We cleaned it up and it’s run efficiently. Except it hasn’t paid for the sins of the past.”

John Christie is publisher and senior reporter for the Maine Center for Public Interest Reporting, a non-partisan and nonprofit journalism organization based in Hallowell. His e-mail is mainecenter@gmail.com. The center website is pinetreewatchdog.org.