AUGUSTA, Maine — Lawmakers, already reeling from projected revenue shortfalls of $570 million, have been told that in two years, the state retirement system will need a doubling of state cash as a result of the recession-related loss of investment revenue.
“You could feel the air go out of the room,” said Sen. Bill Diamond, D-Windham, co-chairman of the Appropriations Committee. “First off we were told we have good news for you that nothing needs to change in the next biennium. Then, they came back with the more sobering news that we are looking at a half-billion dollars, possibly, in the next biennium after this one.”
In their presentation to the Appropriations Committee last week, retirement system officials said the investments by the fund had been hammered by the recession and the drop in the stock market. In the budget for the two years starting July 1, the system is appropriated $436 million. But for budget years 2012 and 2013, the likely need will be between $898 million and $1.078 billion.
There is no immediate impact, board member Peter Leslie explained, because of the way the board and its actuaries look at investment performance over a period of years.
“We use essentially a flat projection of 7.75 percent over the horizon,” he said, “We don’t make any attempt to predict ups and downs, but look at trend lines.”
Leslie said that tends to smooth out and the peaks and valleys in the stock market and the predicted earnings that the system makes on those investments.
“The report from the retirement system explaining the impact of the losses in investments in the retirement system was an eye-opener and just a stunning number,” said Sen. Richard Rosen, R-Bucksport, a member of the Appropriations Committee. He said the huge amount of money that will be needed in two years to address the constitutionally mandated funding of the retirement system has put “enormous pressure” on the budget writers to find cuts and restructure the way the state provides services that will continue into the future.
“We have to do a better job looking to the future,” he said, “and I include myself in that criticism.”
Rep. Emily Cain, D-Orono, the House co-chair of the panel, said committee members were surprised at the size of the retirement system need, on top of the revenue and economic forecasts that project weak state revenues over the next four years and the loss of federal stimulus funds that end in two years.
“This has caused all to think about what we can do to prepare for what is coming,” she said. “The budget problems in two years are going to be huge.”
Rep. Sawin Millett, R-Waterford, said he was not surprised the retirement system had stocks that lost value in the market downturn, but he is concerned about the size of the loss over a 12-month period and its implications for the future.
Millett served as finance commissioner in the administration of Gov. John McKernan and said that while budgets and programs can be cut, the obligation to the retirement system is in the state constitution.
“We do have a commitment and we will live up to that commitment,” said Senate President Elizabeth Mitchell, D-Vassalboro. “Will it be easy? No it won’t. But we will find a way”
She said state retirees should not be worried about the health of the retirement fund. She said the state must meet its obligations to the fund.
Rep. Josh Tardy, R-Newport, the GOP House leader, agreed. He said the obligations must be met despite the fiscal impact.
“This underscores the need to make structural changes in state government now,” he said.
Committee members are discussing the best way to address the looming obligation to the retirement system. They may create a new study group to focus just on how to fund the obligation to the retirement system or may make it part of the commission that Gov. Baldacci has proposed to find ongoing budget savings of $37.5 mil-lion in the two-year budget now being crafted.