State pledge to meet all teacher pension costs means big budget increases

Just four years after the state borrowed $2 billion to shore up the troubled retired teachers’ pension fund, another infusion of state money will be necessary to cope with the hit the fund took during the recession.

Gov. Dannel P. Malloy’s budget office estimated this week that teacher pension-related spending will jump 40 percent over this fiscal year and next combined — one of the fastest growing state expenses — climbing more than $260 million since 2010-11.

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“Since we lost money in the market, we now have to make up for it by increasing the contributions that we make,” said Gian-Carl Casa, an undersecretary at the Office of Policy and Management.

Over the 2009 and 2010 fiscal years, the market value of teacher pension fund investments plunged by $2.3 billion, according to the latest actuarial report.

The losses mirrored problems experienced by nearly all states in the last recession. The Dow Jones Industrial Average, one of the leading indicators of the health of blue-chip stocks, hovered close to 11,300 points entering July 2008, but plunged to a recession-low 6,626 by early March 2009.

“I don’t think any state’s fund was immune from the market downturn,” state Treasurer Denise L. Nappier said Thursday.

The fund uses contributions from government and from teachers, as well as investment earnings, to pay for the benefits paid to about 50,000 retirees. When earnings fall, contributions typically rise. Those contributions fulfill two purposes: saving funds to cover benefits earned by teachers during the year, and catching up on savings Connecticut should have deposited in the past, but did not.

And when the state borrowed the $2 billion to prop the pension fund up, it pledged to its investors to contribute the full annual payment recommended by fund analysts, or actuaries.

“The state was using the teachers’ pension as an ATM before this. The teachers feel more secure now,” said Mary Loftus Levine, leader of the Connecticut Education Association, the state’s largest teachers union. Connecticut teachers are not eligible for Social Security.

“This is the right thing to do,” she said, adding it being the fastest growing state expense could be because Connecticut no longer has any other choice but to “properly” fund the pension system.

Past legislatures and governors routinely budgeted less-than-recommended levels for the teachers’ pension fund before the borrowing plan was enacted in 2007. The fund had enough savings to cover 60 percent of its obligations in 2006. Actuaries typically cite 80 percent as a fiscally healthy level.

But while the borrowing helped boost the pension’s funded ratio to 70 percent of obligations in mid-2008, that ratio had fallen to 61 percent by June 30, 2010.

State government paid $647 million last fiscal year to cover fund contributions and debt payments on the $2 billion borrowed. The state Office of Policy and Management projected this week in its annual forecast of short- and long-term budget trends that these expenses will rise to $838 million this fiscal year, $909 million next year and reach $1.02 billion by 2016.

Rep. Vincent Candelora, R-North Branford, and member of the Finance, Revenue and Bonding Committee, said this added price tag to the fund “should send up major red flags for us.”

While he understands that the economy has caused the market to plunge, he also remembers being promised a 6.5 percent return when the state decided to borrow $2 billion to prop up this pension.

“It’s a huge problem. We put in $2 billion to catch up in 2007,” he said.

On a more positive note, Nappier added that teacher pension fund investments have fared much better since the last recession. Fund investments earned a 21 percent return in the 2010-11 fiscal year, she said.