Tag Archives: Maryland Public Policy Institute

Maryland’s “severe financial management issues”

Budgetary balance continues to evade Maryland. In FY 2015 the state anticipates a deficit of $400 million. A fact that is being blaming on entitlements, mandated spending, and fiscal mismanagement in the Developmental Disabilities Administration. The agency has been cited by the HHS Inspector General as over billing the Federal government by $20.6 billion for Medicaid expenses.

For over a decade the state has struggled with structural deficits, or,  spending exceeding revenues. The state’s method of controlling spending – the Spending Affordability Commission – has overseen 30 years of spending increases, and its Debt Affordability Commission has compounded the problem by increasing the state’s debt limits in order to expand spending.

For the details, visit my blog post for the Maryland Public Policy Institute. Of related interest is the Tax Foundation’s recent ranking of government spending the states. Maryland ranks 19, and has increased spending by 30.5% since 2011  2001.

Maryland Study Finds States Spend Too Much on Wall Street

A report from the Maryland Tax Education Foundation and the Maryland Public Policy Institute finds that state pension funds spend a significant amount of money paying investors to manage their funds. States spent $7.8 billion on Wall Street in 2011. Funds’ recent poor performance casts these expenditures in a particularly bad light for taxpayers, and the Maryland researchers Jeff Hooke and Michael Tasselmyer suggest these funds are not well-spent.

Much less expensive investment strategies are available to investment funds, however, these investment strategies rely on index funds that typically seek to match the market’s performance rather than outpace it. However, as Governing the States and Localities explains:

Pension experts interviewed for this story, though, question the validity of the report, which compares investment firm fees with each plan’s net assets. Even with the higher fees, they say additional returns from investment managers outweigh the added cost in the long run, and tossing more money into equity index funds wouldn’t diversify portfolios.

“The suggestion that all public pensions should be shifted into index accounts is just not well informed,” said Keith Brainard, research director for the National Association of State Retirement Administrators.

The need to outperform the market comes from the way that states value their liabilities. Rather than valuing defined benefit pensions at the appropriate risk-free discount rate, states choose to assume higher rates of return, commonly 5 percent above the risk-free rate. When a low-risk investment strategy fails to meet these returns, state fund managers are incentivized to pursue riskier strategies with the hope of making the return needed to make the defined benefit obligations. This is demonstrated in state funds’ participation in recent IPOs.

The Maryland report states:

For many state pension funds, investment results over the last 10 years have failed to hit target returns of 7 to 8 percent annually. This has prompted Maryland’s System and other state systems to make large commitments to “alternative investments,” like leveraged buyout funds and hedge funds, with the hope of obtaining higher returns than conventional public stocks and bonds. In fiscal 2011, 25 percent of the Maryland System’s investment portfolio was in alternative investments, including private equity and real estate.

alternative investments are less liquid, less transparent, and more volatile than conventional public stocks and bonds. It is also questionable whether these investments provide higher returns than a similar risk-adjusted portfolio of public equities. Buyout fund promoters claim higher returns, for example, but many of their leveraged buyouts from the pre-crash period have yet to sell, and the state pension systems rely on the buyout funds’ in-house valuation of such investments to determine pension investment returns. The states exercise limited supervision over the buyout funds, and the examination of buyout fund portfo- lio values by fund auditors is typically inadequate.

With a risk-free discount rate for valuing guaranteed defined benefits, state fund managers would not be faced with the choice of either accepting higher risks or facing a reality of falling short on obligations. In determining what discount rate to choose, state policymakers should remember that the benefit level determines the cost of pension plans. Lowering the assumed rate of return does not change the cost of pensions, but merely means taxpayers will be paying for benefits as they are accrued, whereas a higher discount rate pushes these payments into the future.


Eileen on Maryland’s Budget

In FY 2011 Maryland enters its third year of recession and fifth year of structural deficit, with ongoing revenues insufficient to cover ongoing spending. To address this year’s $2 billion shortfall, the state cut spending by $1 billion, and applied $1.27 billion in federal stimulus funds, one-time revenue fixes of $25 million, and $800 million in fund transfers. Budgetary balance in the coming year hinges on anticipated revenues from video lotteries and the assumption that Congress will extend the stimulus’s increased Medicaid matching provision to fill $389 million of the budget gap.

These tactics are not part of a one-time strategy prompted by the recession. Maryland has struggled to balance its budget for much of the last decade. The state’s structural deficit has continued to deepen since 2007, leading to the legalization of video lottery gaming to increase revenues. To date, these revenues have been insufficient to meet the gap. Budgetary balance has been achieved through fiscal maneuvers including fund sweeps, debt finance, federal aid, and the state’s Rainy Day Fund. In spite of these maneuvers, by 2015 the structural deficit is projected to grow to $1.65 billion.

That is Eileen, writing in the inaugural issue of The Maryland Journal. Congratulations to Eileen and thanks to the Maryland Public Policy Institute for offering what looks to be an informative new venue for scholarly work on state issues.

Maryland’s Fiscal Slide

Maryland Journal has released its first issue. A publication of the Maryland Public Policy Institute the inaugural issue features my article on Maryland’s Fiscal Slide which examines the state’s fiscal institutions and current budgetary problems.

Additionally the journal features an interesting case study of the city of Baltimore, How to Make Baltimore a Superstar City, by Stephen K. Walters and Louis Miserendino.