HB 496/SB 474 will phase out, over 10 years, the corridor methodof funding the pensions for state employees and teachers, and return to using the more traditional actuarially determined Annual Required Contribution (ARC).
Under the corridor method, adopted in 2002, the state could maintain its contribution rate in effect for the Teachers’ and Employees’ combined systems at prior year levels every year as long as the funding level for the systems remained between a “corridor” of 90% and 110% funded. If either system fell below 90% funded, the contribution rate for the subsequent fiscal year would be set at the rate in effect for the preceding fiscal year, plus 20% of the difference between what is actuarially required and the prior fiscal year contribution rate.
The corridor method has been cited as one of the causes for the current underfunding of the state pension system. Since the recession of early 2003, the contribution level has been less than the actuarially appropriate amount. "The Legislature has taken a very important step in eliminating a funding method that has contributed to an underfunding of the system," said Maryland State Treasurer Nancy K. Kopp, who also is chair of the Maryland State Retirement and Pension System Board of Trustees. “The pension reforms that the General Assembly enacted two years ago are on course to lead us to our goal of a fully funded system, and this additional reform of the state funding policy will help sustain it in the long term.”