GL.00
Maryland Supplemental Retirement Plans
Operating Budget Data
($ in Thousands)
FY 00 FY 01 FY 02 % Change
Actual Working Allowance Change Prior Year
Special Fund $1,364 $1,359 $1,587 $229 16.8%
Total Funds $1,364 $1,359 $1,587 $229 16.8%
! Of the $229,000 allowance increase, $178,000 reflects increased costs associated with permanent
positions, including two positions that were added in the fiscal 2001 budget but not funded in
fiscal 2001.
Personnel Data
FY 00 FY 01 FY 02
Actual Working Allowance Change
Regular Positions 16.50 16.50 16.50 0.00
Contractual FTEs 0.00 0.00 0.00 0.00
Total Personnel 16.50 16.50 16.50 0.00
Vacancy Data: Permanent
Budgeted Turnover: FY 02 1.52 9.19%
Positions Vacant as of 12/31/00 0.00 0.00%
! No new positions.
Note: Numbers may not sum to total due to rounding.
For further information contact: Matthew D. Riven Phone: (410) 946-5530
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GL.00 - Maryland Supplemental Retirement Plans
Analysis in Brief
Issues
Deferred Compensation Matching Program Participation Continues to Increase: The State’s $600
employer match program to the payroll deferral programs for State employee members of the Employees’
Pension System (EPS) continued to dramatically increase the participation of EPS members in these
deferral programs. Participation among match-eligible employees is currently 74%, and is forecast to peak
at approximately 85%.
Board's Fee Revenues and Reserves May Fail to Cover Fiscal 2001 Expenditures: The board’s
carryover balance has been reduced, due to fee structure cuts, market declines, and increased expenditures.
Now the board may face difficulties remaining in a positive balance at the end of fiscal 2001 and may have
similar troubles in fiscal 2002. Over the longer term, the board’s revenues should be sufficient to meet
expenses, although the board may wish to consider changes to make its revenue base more stable.
Recommended Actions
Funds Positions
1. Reduce appropriation by $100,000 because agency’s budget $ 100,000
exceeds anticipated revenues.
Total Reductions $ 100,000
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GL.00
Maryland Supplemental Retirement Plans
Operating Budget Analysis
Program Description
This agency was created to enable State employees and teachers to participate in voluntary tax-
sheltered income deferral, tax-deferred annuity, profit sharing, and salary reduction plans. These plans
offer members certain tax advantages as provided in the Internal Revenue Code. The plans are overseen
by a board of trustees and its supporting agency staff.
Agency staff primarily provides outreach and communications programs to employees statewide
through a series of seminars. In addition, the staff supports the activities of the board of trustees, manages
the 401(k) transfer plan, reports to members, and submits an annual report to the Governor and General
Assembly.
The board finances its operations through a fee imposed on the employee-participants, based as a
percent of assets in the plans. As of January 1, 2000, the board imposes a six basis-point (0.06%) fee
(reduced from eight basis points) on assets in the 457, 403(b), and 401(k) deferral plans and a 16 basis-
point (0.16%) fee on assets in the 401(k) transfer plan, which it self-administers. The board has contracted
out the management of the 457, 403(b), and 401(k) deferral plans to PEBSCO, a private administrator.
The administrator currently imposes a 28 basis-point (0.28%) fee on assets in those plans. Member fees
are capped at $1,200 per member for the payroll deferral programs and $400 for the 401(k) transfer plan.
Governor’s Proposed Budget
As shown in Exhibit 1, the Governor’s fiscal 2002 allowance reflects a $229,000 increase over the
fiscal 2001 working appropriation. Of this increase, $178,000 is associated with permanent position costs.
Part of this increase is due to budget actions last year, in which two positions were added but the funding
for these positions was cut. As a result, salary increases in fiscal 2002 reflect the funding for these
positions, plus the statewide increases in the prior and current years.
Other increases in the agency’s budget include training costs, postage and telephone charges, travel,
computer equipment, garage rent, statewide communication charges, and office supplies.
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GL.00 - Maryland Supplemental Retirement Plans
Exhibit 1
Governor's Proposed Budget
Maryland Supplemental Retirement Plans
($ in Thousands)
Special
How Much It Grows: Fund Total
2001 Working Appropriation $1,359 $1,359
2002 Governor's Allowance 1,587 1,587
Amount Change $229 $229
Percent Change 16.8% 16.8%
Where It Goes:
Personnel Expenses
Fiscal 2002 general salary increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17
Increments, fiscal 2001 increase phase-in, and funding for two positions created in
fiscal 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Employee and retiree health insurance rate change . . . . . . . . . . . . . . . . . . . . . . . . . 17
Retirement contribution rate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
Turnover adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
Other fringe benefit adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Subtotal Personnel Costs 178
Other Increases
Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Postage and telephone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Garage rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Department of Budget and Management (DBM) paid telecommunications . . . . . . . . 10
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Changes (1)
Total $229
Note: Numbers may not sum to total due to rounding.
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GL.00 - Maryland Supplemental Retirement Plans
Performance Analysis: Managing for Results
Due to the market downturn in the spring of 2000, the plans’ assets did not grow as quickly as
forecast, despite the strong increase in deferrals to the plans by members. The decrease in asset values,
combined with the board’s fee rate cut, reduced the board’s fee revenues. PEBSCO’s fees also failed to
grow as anticipated due to market performance upon which their fees are based. Membership in the plans
continues to grow because of the matching program, although growth was not as high as forecast.
The agency’s projections for future assets -- and the fees which the board and PEBSCO would collect
on those assets -- are fairly rosy. As indicated in Exhibit 2, the board assumes growth in assets of almost
15% per year between 2000 and 2002, and assumes growth in fees of more than 19% per year over the
same period. These assumptions are driven primarily by the board’s forecast of market performance.
Actual market performance could be very different, particularly given recent signs of economic slowdown
and market correction. As discussed below, the board’s revenue projections are important in determining
whether the agency will have sufficient funding for its appropriation in fiscal 2001 and 2002.
Exhibit 2
Program Measurement Data
Maryland Supplemental Retirement Plans
Fiscal Years
Ann. Ann.
Actual Actual Est. Actual Est. Est. Chg. Chg.
1998 1999 2000 2000 2001 2002 98-00 00-02
Plan Assets ($ Millions) $1,306.3 $1,484.8 $1,728.0 $1,646.1 $1,892.7 $2,169.4 12.3% 14.8%
Deferrals/Transfers
($ Millions) $72.7 $81.1 $113.0 $121.2 $136.8 $151.4 29.1% 11.8%
Active Accounts 27,418 34,176 43,350.0 42,073 50,100 58,000 23.9% 17.4%
PEBSCO Fees ($ 000) $3,741.3 $3,487.1 $4,079.0 $3,626.1 $4,423.0 $5,166.0 -1.6% 19.4%
Board Fees ($ 000) $1,115.6 $1,077.1 $1,182.0 $985.0 $1,070.0 $1,400.0 -6.0% 19.2%
Source: Maryland Supplemental Retirement Plans
Last year, the Department of Legislative Services (DLS) made two recommendations regarding the
agency's Managing for Results (MFR) efforts, and the agency incorporated both those recommendations
into its current MFR program. First, DLS recommended that the agency measure participation in the
payroll deferral savings programs by dividing actively deferring employees bythe total number of eligible
State employees. Previously, the agency counted all accounts, including duplicate and dormant accounts,
which produced an artificially high level of participation. Participation among all active State employees
is approximately 52% (up from 42% in 1999), and the agency has set a goal of 85% participation.
DLS also recommended that the agency measure the performance of its investment options compared
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GL.00 - Maryland Supplemental Retirement Plans
to the universe of similar funds over an appropriate time period. Previously, the agency had cited the
change in plan assets (versus the prior year) as a key performance indicator. Asset growth (or decline),
however, is affected by a variety of factors, including overall market performance over which the agency
has no control. This year, the agency has set as its performance indicator the average rate of return for
all the plan's investment options versus the average for all investment indices. The new indicator should
be a more accurate measure of the agency’s effectiveness in selecting funds by showing the relative
performance of these funds versus their indices. The data provided by the agency suggests that over a ten-
year period, the board's investment options have provided annual returns two percentage points higher
than the indices (15.5% versus 13.5%).
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GL.00 - Maryland Supplemental Retirement Plans
Issues
1. Deferred Compensation Matching Program Participation Continues to Increase
The establishment of the $600 employer match program to the three payroll deferral programs for
State employee members of Employees’ Pension System (EPS) continued to dramatically increase the
participation of EPS members in these deferral programs. On the eve of the commencement of the
matching program, June 30, 1999, 53% of the approximately 48,000 State employees who were eligible
to take part in the matching program were already participating in one of the three payroll deferral
programs. Over a year later, participation by EPS members taking advantage of the matching program
had increased to 74%. DLS forecasts that participation will continue to increase until reaching an 85%
equilibrium rate.
Exhibit 3 shows the increase in deferred compensation participation by EPS members because of the
matching program. The exhibit also shows participation among all State employees. It is worth noting
that prior to the matching program, EPS members had a significantly lower participation rate than other
State employees. Given that their defined benefit pension plan provided a lower benefit, an increase in
deferred compensation participation by EPS members will make it more likely that they have an adequate
retirement.
Exhibit 3
401(a) Matching Program Participation - At Various Points in Time
July 15, 1998 June 30, 1999 June 30, 2000 October 31, 2000
Total Eligible 46,750 48,105 49,568 49,128
Total Participation 15,000 (est.) 25,671 35,389 36,328
Match-Eligible Participation Rate 33% (est.) 53% 71% 74%
Participation Rate Among All
State Employees 55% 68% n/a 78%
Note: Program open to EPS members and employees of the Northeast Maryland Waste Disposal Authority only.
Source: Maryland Supplemental Retirement Plans
2. Board's Fee Revenues and Reserves May Fail to Cover Fiscal 2001 Expenditures
As illustrated in Exhibit 4, the board’s expenditures for fiscal 2000 were $1,363,858. While assets
grew somewhat in fiscal 2000, fee collections by the board fell short of covering the board’s annual costs.
Board fees totaled $985,000 for fiscal 2000. The deficit that resulted from expenses exceeding revenues
was $378,858, and was absorbed by the unexpended operating reserve, or carryover balance. This shortfall
can be attributed to the board’s lowering its fee from eight basis points to six basis points, the
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GL.00 - Maryland Supplemental Retirement Plans
Exhibit 4
Maryland Supplemental Retirement Plans
Board Fees, Expenses, and Carryover Balance
Fiscal 1998 through 2002
FY 1998 FY 1999 FY 2000 FY 2001 (Est.) FY 2002 (Est.)
Board Fees $1,115,585 $1,077,391 $985,000 $1,070,000 $1,400,000
As % of Assets 0.11/0.10% 0.10/0.08% .08/0.06% 0.06% 0.06%
Operating Expenses $1,009,917 $1,126,742 $1,363,858 $1,358,664* $1,587,452
Carryover Balance $804,458 $755,108 $376,250 ($2,414) ($189,866)
Carryover Balance as
% of Operating
Expenses 79.7% 67.0% 27.6% (0.2%) (12.0%)
*Does not include anticipated $90,000 fiscal 2001 budget amendment.
Note: Board fees reduced on January 1, 1998, January 1, 1999, and January 1, 2000.
Source: Maryland Supplemental Retirement Plans
board's continued decision to absorb fees for members with large assets whose fees would have otherwise
exceeded the cap, and much lower than expected asset growth due to market adjustments.
As a result, the carryover balance declined 50%, from $755,108 at the end of fiscal 1999, to $376,250
at the end of fiscal 2000. The carryover balance is calculated as the cumulative sum of the amount that
the board’s fee reserve exceeds its appropriated budget each year. This balance is now equal to 27.6%
of the agency’s annual operating expenses. The board should be commended for reducing the carryover
balance, which had been higher than necessary for many years.
The board, however, now faces the opposite problem: its operating deficit and decreased carryover
balance may cause the plans to run a negative balance at the end of fiscal 2001. There are several causes
for this abrupt change of events. First, the board cuts fee structure by 25% when it lowered its asset fee
from eight basis points to six basis points. Second, financial market performance has been substantially
lower than the board’s forecast for the fiscal 2001 year-to-date. Because board fees are calculated as a
percent of members’ assets, if the markets decline -- and hence members’ portfolios decline -- then so too
will the board’s fees. This poor market performance is in contrast to the past several years, when the
board (just as most other market observers) underestimated the growth rate in the financial markets.
Finally, the agency’s operating budget has increased both for internal reasons (staff growth, increased
communications, and field staff activities) and external reasons (statewide pay increases), increasing the
gap between revenues and expenditures.
The board believes that there is no cause for alarm. The board estimates that any negative balance at
the end of fiscal 2001 will be less than $50,000. To avoid a negative balance, however, the board has
ordered the agency to avoid unnecessary expenses and delay other expenditures, such as document
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GL.00 - Maryland Supplemental Retirement Plans
publication. The board advises that, if necessary, PEBSCO will forfeit some of its fiscal 2001 fees on
behalf of the board. As for the long-term, the board believes that agency expenses will grow slower (at
a rate of approximately 3% to 4% per year) than will the plans’ asset base (at a rate of approximately 8%,
using the pension board’s actuarial assumption).
DLS agrees with the board’s assessment that over the long term, the agency’s revenues should grow
faster than its expenditures. DLS notes several issues, however, that will affect the agency in the short-
and medium-term. First, the board may be unable to build up a sufficient reserve over this time period to
protect itself in an economic downturn. Simply ending fiscal 2001 with a small positive balance will not
put the board in a sound position for fiscal 2002. DLS also questions the practice of an agency’s
contractor voluntarily “giving” money to an agency; it can be assumed that the contractor will expect to
recoup those funds at some point.
Second, the agency’s revenue projections for fiscal 2002 are fairly rosy, assuming 14% growth in
assets and 19% growth in board fees. These returns would be significantly higher than either the average
Standard & Poors 500 return for calendar 2000 (a 10.1% loss) or the historical average market return of
8% to 12%. Given the recent signs of economic slowdown and market correction, it is not clear that these
projections can be realized. Even if these projections are met, the $1.4 million in fees collected in fiscal
2002 under these projections still will be about $200,000 less than the $1.6 million budget allowance for
fiscal 2002.
Finally, the board has a stated policy of never raising member fees. Such a policy is to be commended
because it puts the appropriate emphasis on reducing the agency’s expenditures and increasing operational
efficiency. This policy, however, leaves the board with few options to make revenues meet expenditures
when it appears that, in the near term, expenditures will exceed revenues. The board may have no choice
but to consider raising fees. In doing so, the board may wish to consider revenue options that are less
volatile than the asset fee, which is highly sensitive to market performance. For example, the board
historically had a per-head membership fee, but eliminated it two years ago. While such an annual fee is
regressive (because it impacts members with smaller accounts more heavily, on asset basis), it provides
more stable revenue and may more accurately correspond with the agency’s workload. To reduce the
regressivity, the membership fee could be imposed at a low level to supplement the board's asset fee. The
board might also consider removing or increasing the board’s cap on member asset fee payments. This
cap, under which the board reimburses PEBSCO for foregone member fees when such fees hit a
maximum, is a highly regressive board policy that favors members with the largest accounts.
The board should be prepared to discuss its plans for addressing a potential revenue shortfall
at the end of fiscal 2001 and for ensuring adequate revenues during fiscal 2002 and beyond. The
board should address its fiscal 2002 revenue projections and whether they will be adequate to cover
2002 expenditures.
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GL.00 - Maryland Supplemental Retirement Plans
Recommended Actions
Amount Position
Reduction Reduction
1. Reduce appropriation by $100,000 because agency’s $ 100,000 SF
budget exceeds anticipated revenues. If the agency’s
special fund revenues prove to be higher than expected,
then the agency may seek to reinstate this reduction via
the amendment process.
Total Special Fund Reductions $ 100,000
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GL.00 - Maryland Supplemental Retirement Plans
Appendix 1
Current and Prior Year Budgets
Current and Prior Year Budgets
Maryland Supplemental Retirement Plans
($ in Thousands)
General Special Federal Reimb.
Fund Fund Fund Fund Total
Fiscal 2000
Legislative
Appropriation $0 $1,364 $0 $0 $1,364
Deficiency
Appropriation 0 0 0 0 0
Budget
Amendments 0 0 0 0 0
Reversions and
Cancellations 0 0 0 0 $0
Actual
Expenditures $0 $1,364 $0 $0 $1,364
Fiscal 2001
Legislative
Appropriation $0 $1,359 $0 $0 $1,359
Budget
Amendments 0 0* 0 0 0
Working
Appropriation $0 $1,359 $0 $0 $1,359
*Agency anticipates a FY01 budget amendment of approximately $90,000.
Note: Numbers may not sum to total due to rounding.
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Object/Fund Difference Report
Maryland Supplemental Retirement Plans
FY01
FY00 Working FY02 FY01 - FY02 Percent
Object/Fund Actual Appropriation Allowance Amount Change Change
Positions
01 Regular 16.50 16.50 16.50 0 0%
Total Positions 16.50 16.50 16.50 0 0%
Objects
GL.00 - Maryland Supplemental Retirement Plans
01 Salaries and Wages $ 864,752 $ 779,514 $ 957,502 $ 177,988 22.8%
02 Technical & Spec Fees 6,279 9,225 13,000 3,775 40.9%
03 Communication 20,149 37,720 55,937 18,217 48.3%
04 Travel 35,070 36,510 46,500 9,990 27.4%
07 Motor Vehicles 11,295 10,800 14,580 3,780 35.0%
08 Contractual Services 277,291 376,355 371,199 (5,156) (1.4%)
09 Supplies & Materials 32,488 18,715 31,560 12,845 68.6%
10 Equipment - Replacement 1,422 2,400 2,400 0 0%
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11 Equipment - Additional 44,133 9,341 11,847 2,506 26.8%
13 Fixed Charges 70,979 78,084 82,927 4,843 6.2%
Total Objects $ 1,363,858 $ 1,358,664 $ 1,587,452 $ 228,788 16.8%
Funds
03 Special Fund $ 1,363,858 $ 1,358,664 $ 1,587,452 $ 228,788 16.8%
Total Funds $ 1,363,858 $ 1,358,664 $ 1,587,452 $ 228,788 16.8%
Note: Full-time and contractual positions and salaries are reflected for operating budget programs only.
Appendix 2