Maine versus New Hampshire XI: The Battle of Unfunded Pension Liabilities

Maine versus New Hampshire XI: The Battle of Unfunded Pension Liabilities

February 8, 2011 Posted by J. Scott Moody - 4 Comments

In my recent study, “The Cost of Doing Nothing: Maine’s Pension Payments are Crowding Out Other Spending,” (pdf) I noted that as Maine’s pension payments grow the budget process will, more and more, be held hostage by factors outside of the state such as the performance of the stock market which affect the asset side of the ledger.  To put this into perspective, let’s compare Maine’s pension assets with New Hampshire’s.

In 2010, Maine had set aside $10.4 billion in assets while New Hampshire has set aside $5.2 billion.  Assuming they both experience a 10 percent drop in assets, then Maine’s assets would fall by $1.04 billion while New Hampshire’s assets would fall by $520 million.  While both states will have to make up this investment shortfall with higher pension contributions, Maine’s taxpayers will be left footing a bill that is twice as large as in New Hampshire.

Of course, the reason why New Hampshire has a smaller asset pool is because they also have a smaller overall pension liability–$9 billion in New Hampshire versus $14.8 billion in Maine.  Therefore, the solution to this vulnerability in Maine’s budget process is to significantly reform Maine’s pension system in order to reduce the overall pension liability.

One reform is to right-size the Maine state government workforce which I estimate would save over $200 million annually and a lot more in future pension costs.  Another reform is to move from the defined-benefit system to a defined-contribution system (401k).  Without these reforms, the uncertainty of the size of the pension payment in Maine’s budgeting process will continue to worsen.