Testimony of David S. Wakelin - former Chair of the Retirement System Board of Trustees

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Testimony of David S. Wakelin

Wakelin is former Chair of the Retirement System Board of Trustees
Mr. Wakelin delivered his testimony before the Joint Standing Committee on Appropriations and Financial Affairs at the hearing on March 4, 2011

Senator Rosen, Representative Flood and Members of the Joint Standing Committee on Appropriations and Financial Affairs. My name is David S. Wakelin. I am a pension lawyer from South Portland, and I have spent the last 24 years building and protecting the Retirement System, first as a member of the so-called "Monks Commission" in 1987, and then as a member of the Retirement System Board of Trustees from 1988 to 2008, and Chair of that Board from 1993 to 2007. I appear today on behalf of Maine state employees and teachers.

I respectfully disagree with statements made to this Committee by the Governor and Treasurer Poliquin in two important respects: (1) Maine does not have a pension funding "crisis"; and (2) It is not necessary to substantially reduce participant and retiree benefits to address this problem. The State has a problem that has existed for 40-50 years, which has been responsibly addressed by Republican, Independent and Democratic Governors over the last 20 years. In 1987, the System was only 26% funded (assets of approximately $1.0 billion and liabilities over $4.0 billion). Now, the System is over 70% funded. The Unfunded Actuarial Liability (UAL) today is far less than it was in l987 in inflation-adjusted dollars.

The current cash flow problem is man-made (inadvertently created by the drafters of the 1995 Constitutional Amendment which introduced the 2028 target date and the 10-year amortization requirement for "experience losses"). The Treasurer has warned against correcting the problem with a Constitutional Amendment. But the Constitution is a living document, which has been changed twice in the last 20 years on MePERS matters, and one of these changes created the current funding increase. Why should it not be corrected by another sensible mid-course correction in 2011? A simple Constitutional Amendment can correct the problem.

Some have alleged that Maine teachers and State employees are overpaid and have too rich benefits. I respectfully submit that this is incorrect. When their compensation and benefits are compared on an education-adjusted basis, they are below private sector salaries and benefits. (See New York Times article, Saturday, February 26, 2011.)

The Governor's budget proposes to increase participant retirement contributions and substantially decrease retirement benefits. First, teachers and State employees are currently paying 58% of the current "normal" cost of their benefits (7.65% out of 13.15% total), whereas employees in the private sector only pay 50% of their Social Security benefits. Second, we need to remember that Maine teachers and State employees are not receiving Social Security, and thus their MePERS benefits need to be compared to the total retirement benefits private sector employees receive from both Social Security and their 401(k) plans. This comparison clearly shows that the Maine public employee retirement benefits are in line with or lower than total private sector benefits.

Finally, as the 2010 Maine URP Task Force reported, the State is currently paying only 5.5% of employee compensation toward retirement benefits (the UAL contribution is not for current employees, but rather for past-promised benefits). In the private sector, employers pay 6.2% to Social Security, plus a 401(k) contribution from 3-6%, for totals from 9.2% - 12.2%. Thus, private sector employers make retirement contributions that are 50-100% higher than Maine pays its teachers and State employees. If this disparity is increased, it could have a serious negative impact on the ability of the State to attract and retain top quality employees in the future.

I am asking two things of the Committee today:

(1) Allow the employee groups to constructively participate in discussions on any changes to the Retirement System in order to minimize the negative impact on current employees and retirees; and

(2) Retain an open mind that the funding dilemma created by the 1995 Constitutional Amendment can be solved by a responsible corrective Amendment to the Constitution.

Thank you for your consideration of my testimony.