Gov. M. Jodi Rell’s deputy budget director unveiled a new plan Thursday to shave $300 million off annual pension costs by boosting worker contribution rates, raising retirement ages and developing a new 401(k)-style retirement plan for new employees.
The proposals, offered to the governor’s Post Employment Benefits Commission, were part of a larger plan to stabilize the Connecticut’s severely under-funded pension program that also includes an end to retirement incentive programs and larger annual contributions by state government.
“As a long-term strategy it seems to make sense, to introduce some stability,” Michael J. Cicchetti, deputy secretary of the Office of Policy and Management and chairman of the commission, said during a meeting in the Legislative Office Building.
Cicchetti, whose group is expected by mid-September to issue a blueprint for stabilizing retirement benefit programs, also called for new restrictions on retiree health benefits, including an end to coverage for vested state employees who leave for private-sector jobs before retirement.
“It’s probably not something we can do overnight,” Cicchetti said of several components of his plan, noting the huge funding gaps in retirement benefit program budgets developed over decades.
The next full actuarial valuation of the state employees’ pension fund isn’t due until November, but a preliminary analysis for the commission projects government should contribute just under $1.03 billion next fiscal year. That’s up $185 million from the $844 million being contributed this year.
The annual contribution should cover two costs: the pension benefits that are accrued by covered employees during the year; and the amount needed to cover past years when the state failed to contribute enough.
It’s the latter expense that is plaguing Connecticut now.
According to the last valuation, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion–an amount equal to 52 percent of its liability. Actuaries typically cite a funded ratio of about 80 percent as healthy.
Connecticut governors, legislatures and worker unions have a history, during tough fiscal times, of allowing reduced payments into the fund, without changing the level of benefits that still must be paid out. For example, Rell, the current legislature and the State Employees Bargaining Agent Coalition has allowed $314.5 million in pension fund payments to have been deferred since 2009.
A retirement incentive program offered in 2009 also weakened the pension fund, trimming salary expenses in the short-term while prematurely stripping the fund of assets that would have earned more in interest over the coming decades.
Further complicating matters, the 20-year contract reached in 1997 by SEBAC and then-Gov. John G. Rowland allows the state to calculate its annual pension contribution based on a fixed percentage of overall payroll. Rather than following a level payment schedule, that system effectively allowed for smaller annual contributions earlier in the deal, with escalating payments as the deal nears its end in 2017.
Cicchetti said the state should eliminate its bad habits. That means switching to a level payment schedule and avoiding future retirement incentive programs. This could add an extra $363 million to next year’s contribution, he estimated.
To offset nearly $300 million of that added cost, Cicchetti proposed a battery of new worker costs and limits on benefits, including.
- Adding 3 percentage points to the share of salary that each worker must deposit into the pension fund. Most workers currently contribute between 1 and 2 percent, depending on when they were hired.
- Raising the retirement age for all workers hired after 1984 from 62 to 65.
- Increasing penalties for early retirement outside of state-approved incentive programs.
- Calculating pensions based on the average salary of a worker’s last five years, rather than the current three.
- Creating a new defined contribution plan, similar to the 401 (k) programs offered by many private-sector employers, for new state workers.
State government faces an even larger problem with the health care benefits its offers to about 42,000 retirees and 100,000 dependents. The long-term liability of covering current and future retirees and their spouses over the next three decades, is projected at $21.7 billion. The state, which has saved just $10 million toward that expense, basically operates a pay-as-you-go system, paying for the benefits each year out of its budget with little investment earnings to help cover the cost.
A report issued to the commission in June projected that annual spending for this benefit, which is expected to top $490 million in this year’s $19.01 billion budget, will begin rising dramatically. If Connecticut remains on the pay-as-you-go system, the average cost over the next 28 years will be $1.9 billion.
To help counter this trend, Cicchetti proposed requiring all workers to contribute toward this expense. Currently, only new workers and those hired within the last five years must contribute 3 percent of their salary toward this benefit.
Another proposal would end the so-called portability of retiree health benefits.
Currently, any state employee with more than 10 years of experience can leave state service for another job, and still claim that health benefit upon retirement. Some other states only provide health care to individuals who retire directly from state service.
Salvatore Luciano, a commission member and veteran state union leader, predicted this only would increae the ranks of Connecticut’s uninsured, and lead more people to seek free treatment in hospital emergency rooms – an expense the state already helps to cover.
But commission member Julie E. McNeal, an officer with the Connecticut Society of Certified Public Accountants, said blocking those who leave state service from enjoying state-funded health benefits upon retirement would leave them no worse off than those in the private sector. “There should be individual savings available as well,” she said, “just like the rest of the world.”
Most recommendations offered Thursday also would require approval of state employee unions. Luciano predicted labor would object to those that ask workers to sacrifice to cover state government’s failure to save properly.
“Even if we stopped the pensions tomorrow, we’d still have huge liabilities,” he said, adding state officials need to adopt a more progressive tax system that recognizes “this amazing huge gulf” of wealth and requires the rich to pay more.