Op-Ed: Reform the costly, overly generous, state pension system

The enormous unfunded pension liabilities of the State of Connecticut have hardly been discussed so far in the run up to the November gubernatorial election. Nevertheless, the question needs to be raised, for whoever is governor after the November election will inevitably have to reform the state’s employee pension plan or face the possibility of bankruptcy.

A relatively small but significant first step in reforming the system would be to freeze pension benefits for all existing state employees not covered by union contractual obligations. These employees would include non-union members and employees of the state’s executive, legislative, and judicial branches. It would also include all administrators in the University of Connecticut system.

Op-ed submit bugIn the future these employees could participate in a defined contribution or 401k-type plan. This reform would still provide them with a retirement income, consisting of the vested value of the current plan as well as the accumulated value of the new defined contribution plan. This combination would still be superior to what is available to citizens in the private sector.

This reform would reduce the state’s enormous pension liability while at the same time eliminating some major abuses. Here are some examples. Gov. Dannel Malloy recently appointed a 66-year-old leading Democratic politician and lawyer to the state’s highest court. In four years the new judge will be eligible for a pension of $100,000 per year for life. It takes $2.5 million earning 4 percent interest to provide an annual income of $100,000. The judge will contribute about 7 percent of his pay or about $10,000 each year to fund his pension. Who will contribute the balance?

The governor has appointed about a dozen lawyers over age 60 to the bench. Each of them will be eligible for an equally generous and impossible to fund pension. The outcry over the latest appointment was so great that in the waning days of the last session, the legislature voted to slightly alter the judicial benefit formula, but only for subsequent appointments.

The governor’s picks were left on the gravy train.

During his tenure the governor has also elevated about a dozen members of the state legislature to work in his administration. Legislators are considered part-time employees and make about $35,000 per year. These appointments to high administrative positions, often with salaries in excess of $100,000, have a dramatic effect on their state pension benefits.

As legislators they contributed 7 percent of their pay to the state pension plan. At retirement their pensions would have been based on a percentage of their $35,000 salary. Now they only need serve three years in their new positions to double or even triple their pension income.

A good example is the case of Andrew McDonald, a lawyer and long time friend of the governor’s from Stamford. After many years in the State legislature, McDonald was appointed legal counsel to the governor almost immediately after his inauguration. McDonald’s salary went from $35,000 per year to well over six figures.

Two years later McDonald was appointed to the state’s highest court with a salary of about $150,000. When he chooses to retire, McDonald’s pension will be based on his highest three years pay and not on the $35,000 annual salary he made as a legislator.

How is it possible for pension actuaries to even calculate state pension liabilities when employees can have such dramatic increases in pay shortly before retirement? I estimate that despite his calls to deal with unfunded pension liabilities, Gov. Malloy has added over $50 million to the state’s liabilities with just these few appointments.

Removing legislators and other political appointees from participation in the state pension plan does not involve breaking any sacrosanct union contracts. The plan for future judicial pensions was changed almost in an instant in response to public outcry.

Not only will such a reform help to reduce the state’s unfunded pension liability, but it should also provide legislators and other officials with an incentive to reform. Under the present system members of the state government were always on the same side of the table with the public service unions when it came to pension negotiations. Everything they gave to the unions also benefited them since they were participants in the same plan.

Once political fat cats not longer have an interest in preserving the existing plan benefit formula, then they might at last be willing to take on the larger and more difficult task of reforming the whole system.

Francis P. DeStefano, Ph.D., of Fairfield, is a writer, lecturer, historian and retired financial planner. 

 

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