Next month Maine will vote on a state question that would amend the state constitution to improve public pension funding. State Question 4 would increase the amortization period for the pension plan to recover investment losses from 10 years to 20 years. This change would make pension contributions more consistent over time, while still allowing the pension fund to manage its investment gains and losses.
An amortization period is a term frequently used by actuaries. It refers to the period of time during which pension plans can manage their investment gains and losses. Basically, if a pension fund expects to earn $100 million in a given year, but only earns $80 million, then the amortization period is the length of time over which the fund can make up the $20 million they did not earn.
During the 1980s, Maine faced many fights over the public pension plan and its funding. These fights resulted in the plan being funded at just 33 percent in 1992. In 1995, Maine voters amended the state constitution to require full funding of the pension plan by 2028. One of the requirements of this amendment was tightening the amortization period to ten years.
These changes have worked well over the past two decades and the plan is now 80 percent funded. However, the tight ten year amortization period means that the pension plan can see volatile changes in pension contributions when the plan experiences a major investment loss, such as the Great Recession. In the aftermath of the recession, the state legislature approved changes proposed by Gov. Paul LePage that included freezing cost of living adjustments (COLAs) for current retirees and capping future adjustments. No one wants to see the state go back on its promises to workers and retirees, which is why Question 4 is so important.
Question 4 will empower the Maine Public Employees Retirement System to manage its investments appropriately and smooth any losses over time. This will reduce the volatility in required contributions for employees and employers. It will also lessen the risk that the state will break its promises to workers and retirees regarding their retirement security.
The Portland Press Herald recently endorsed a “yes” vote on Question 4. Mainers go to the polls on Tuesday, November 7th.
