Malloy unveils plan to reverse two decades of damage to employees’ pension fund

Gov. Dannel P. Malloy unveiled plans Monday to reverse nearly two decades of budget gimmicks that leave the state facing huge payments over the next two decades to sustain Connecticut’s grossly underfunded state employee pension fund.

But while Malloy touted potential long-range savings, they come with a high price that must be paid up front: an extra $3 billion in pension payments between next fiscal year and 2023. After 2024, the contribution would drop annually, and by 2031 Connecticut would be $5.8 billion ahead.

Malloy’s proposal drew a strong endorsement from union leaders and a mixed review from a Republican critic.

House Minority Leader Lawrence F. Cafero Jr., R-Norwalk, said Malloy’s pension concerns are well-placed, but he questioned whether the fiscally strapped state is ready to make its first extra payment of about $123 million in the fiscal year that begins July 1.

Barnes Malloy

Ben Barnes listens as Malloy explains his pension proposal.

“We proposed it long before the governor was the governor,” Cafero said of the need to better fund pensions. “So, I certainly applaud the governor for his efforts.”

Malloy, a Democrat who contrasted his approach to pensions with that of his two Republican predecessors, said the state cannot afford to delay stabilizing the pension fund.

“I made it clear from the day I took office that I am committed to ending years of bad financial practices and getting the state’s fiscal house in order,” Malloy said.  “We have made enormous progress on that front, and in doing so we’ve begun to stabilize the state’s finances. …  But there is more to be done on this front.”

At stake is a pension fund that plunged to its lowest level in more than two decades by mid-2010, holding enough assets to cover just 44 percent of its obligations.

A new report released earlier this month found that by June 2011 the funded ratio had climbed to nearly 48 percent due to healthy investment earnings and some new pension restrictions Malloy negotiated with employee unions last spring. But fund analysts typically cite a funded ratio of 80 percent as a healthy level.

The pension fund has suffered from an array of questionable fiscal policies since it began in the mid-1980s with a huge financial hole. For nearly four decades before that, Connecticut had put nothing away, and therefore gained no investment earnings, to help cover pension costs.

Several early retirement programs and pension fund raids under previous governors and legislatures to help balance the state budget also have weakened the fund.

And the linchpin of Malloy’s plan is to reverse an agreement reached in two stages, in 1995 and 1997, by then-Gov. John G. Rowland and the unions that put the pension program on what amounts to a balloon mortgage schedule.

The two sides agreed to abandon a pension fund contribution schedule that required largely equal payments, with annual inflationary adjustments, over the next 30 years to eliminate the unfunded liability.

In its place they imposed a system of ever-escalating payments. Although payments were lowered in the short-term, they have been increasing dramatically since the late-1990s.

The state’s annual contribution to the pension fund, which stood at $844 million last year and is $926 million this year, is on pace to top $1.5 billion in 2019, $2 billion by 2024, $3 billion by 2029 and approaches $4.5 billion in 2030.

Reversing the actions taken in 1995 and 1997 would cost an extra $123 million starting next fiscal year. After that, Malloy also would gradually increase annual pension contributions further — beyond contractually required levels — starting in 2014, with the goal of funding 80 percent of all pension obligations by 2025 and 100 percent by 2032. The governor’s plan also would exempt all contributions above contractually required payments from the constitutional spending cap.

“It’s no honor to have the worst-funded pension program in the country,” Malloy said. To relinquish that “honor,” Malloy must find the significant dollars in his next state budget.

Technically, Malloy already has the funds he needs to begin making that extra $123 million payment. The preliminary $20.4 billion budget adopted last summer for the 2012-13 fiscal year was designed with a built-in $496 million surplus.

But that budget, and the $20.14 billion plan approved for the current fiscal year, are facing their own problems, due largely to state income tax revenues falling well short of initial projections.

The administration reported last week that the current budget, which was supposed to finish $88 million in the black, now has lost nearly all of that cushion, and is on pace to finish with a $1.4 million surplus.

In addition, the surplus projected for next year is down below $250 million.

Further compounding problems, Malloy also needs to find an extra $75 million this year and $50 million next year to continue the ongoing conversion of state finances to Generally Accepted Accounting Principles.

GAAP rules are a series of common financial guidelines established by the Government Accounting Standards Board to emphasize transparency.

The Malloy administration estimated in its Fiscal Accountability report in mid-November that state government would need another $1.7 billion in its coffers to cover all its obligations under GAAP rules. And that differential grows annually due to inflation. The $125 million Malloy needs would not reduce that differential, but merely would cover inflationary costs and effectively stop it from growing.

“We are realigning our budget objectives,” Malloy said. The governor, who signed more than $1.5 billion in new state taxes into law last spring to help close a record-setting budget deficit, said Monday he would not seek to raise additional taxes to cover his pension proposal.

Cafero said it is “great news” that Malloy wants to end decades of inadequate pension funding, but the governor should have considered asking the State Employees Bargaining Agent Coalition to consider other changes to worker benefits.

“Are there other provisions in SEBAC that can be revisited?” Cafero said.

The concessions package Malloy negotiated with unions last year included a two-year wage freeze, restrictions on retirement benefits, a new employee wellness program and other changes. But it also prohibits Malloy from laying off most unionized workers for four years — a component Cafero has criticized on several occasions.

“Paying off our pension debt is a good thing, but doing so outside of the spending cap shows that Governor Malloy is still not serious about reducing unnecessary state spending and, further, that he is not serious about pension reform,” added Senate Minority Leader John P. McKinney, R-Fairfield. “Clearly, his deal with SEBAC failed to adequately deal with our long term indebtedness. Real leadership requires real reforms and that is what is needed in these difficult times.”

Malloy’s plan, which still needs approval both from unions and from the state Retirement Commission, drew praise Monday from labor leaders.

“It was the responsible thing to do,” said Salvatore Luciano, director of one of the largest bargaining units in state government, Council 4 of the American Federation of State, County and Municipal Employees.

“This has real long-term implications” both to stabilize pensions and to save state government funding, added Robert Rinker, director of CSEA-SEIU Local 2001, formerly the Connecticut State Employees Association.

American Federation of Teachers President Sharon Palmer said not just state officials, but unions as well, were guilty of turning too easily to fiscal gimmicks in the past.

“We became so accustomed to small ideas and quick fixes,” she said, “that we were unable to think any other way. This (proposal) is so important and it makes perfect sense.”

Malloy’s proposal comes as he is about to leave for a prestigious economic conference and after a week of difficult financial news for Connecticut: the state’s financial cushion is shrinking, and a ratings agency last week downgraded the state’s credit rating.

The governor has accepted an invitation to participate in the World Economic Forum’s annual meeting in Davos, Switzerland, beginning Wednesday. He leaves late Tuesday.