A great turnaround



A combination of well-reasoned state policy and effective investment management has turned the Maine Public Employees Retirement System from a program once in trouble to one of ever-increasing solvency. Maine recently was ranked by the Pew Charitable Trusts as 15th best in the nation in terms of putting money aside to meet its retirement benefit obligations — one of 19 state systems paying at least 100 percent of annual recommended contributions.

But it wasn’t so long ago that Maine’s unfunded liability had surged to a dangerous level. In the 1980s, the retirement plan, which now covers more than 100,000 current, former and retired state government employees — teachers, judges, legislators and state and municipal workers — was funded at just 28 percent.

To dig its way out, the state began paying both the current costs of the system as well as a portion of past underfunding. By 1993, the retirement system was funded at 36 percent. The state’s commitment to fund the system fully was enshrined as a mandate in Maine’s Constitution in 1995. The mandate requires that the liability, as calculated in 1995, must be paid off by 2028, that no new unfunded liability can be created intentionally, and that any unplanned additional liability must be paid back within 10 years.

The push to solvency has not come without pain. After reaching a funded level of 70 percent in 2009, the state lost 40 percent of its trust fund investments — a drop from $11 billion to $6.6 billion — when recession gripped the nation. In order to recover that loss over the mandated 10-year period, a three-year freeze was imposed on cost-of-living increases for retirees, and allowable increases were reduced from a maximum of 4 percent to a maximum of 3 percent on the first $20,000 of a retiree’s benefit.

A major and ongoing concern with Maine’s retirement system is that it is a defined benefit system — the amount a retired employee receives is fixed and not based on the market performance of the state’s investments. Because the state’s contribution to the system depends on the return on investment of its trust fund in the stock market, volatility in the market is a constant risk. So a primary focus of Sandy Matheson, executive director of the retirement system, and her staff is to manage the trust fund to keep employer contributions as stable as possible. And they’ve been doing just that. Currently, about 65 percent of Maine’s contributions are targeted for investments in stocks and bonds, 25 percent in real estate and infrastructure and 10 percent in private equity. Those investments have provided a solid average annual rate of return of 5.9 percent over the past decade.

“Markets today are what they are,” said Matheson recently. “We have found that our greatest return happens when we don’t react to the market.”

There’s no crystal ball that can accurately predict what the future will bring. But at least for the moment, the state’s retirement system is in far better shape than those in most states across the nation.

Maine has been exploring a hybrid retirement system plan that would include both defined benefit and defined contribution components, thus limiting investment risks somewhat while providing a stable income stream to retirees. But while those deliberations continue, the state will continue moving ahead to completely erase its unfunded liability by the mandated 2028 deadline.

Based on performance these past seven years, it’s right on track.

Leave a Reply

Your email address will not be published. Required fields are marked *