As Gov. Dannel P. Malloy solicited new ideas to stabilize state finances, he re-emphasized his steadfast opposition this week to an oft-used idea in past budget crises: paying incentives to encourage senior workers to retire.
The governor, who has refused throughout his administration to offer incentives that traditionally weaken the pension system, said Monday that Connecticut must solve its latest budget challenges without this option.
“That does not meet my test of a realistic solution, given the difficulties we have with long-term obligations,” Malloy told Capitol reporters Monday as he called for bipartisan negotiations with legislative leaders to fill a $118 million deficit this fiscal year.
The governor committed the state in 2012 to a plan to reverse decades of underfunding in the pension fund for state employees. Analysts estimate it will take about two decades to fully restore the fund to sound fiscal health.
According to the latest actuarial valuation, the state employees’ pension system had enough assets to cover just 41.5 percent of its long-term liabilities. Analysts typically cite a funded ratio of 80 percent as a mark of sound fiscal health.
“I’ve never shied away from addressing that problem,” said the governor, who proposed the pension fix during his second year in office. “Serious discussions have led to serious results. … But there’s more to be done.”
The theory behind these retirement incentives is simple: Senior workers retire sooner than they planned — relieving the state of their higher salaries. Some positions are refilled with lower-paid, less experienced workers, and others are left vacant to maximize savings.
But critics argue that the short-term gain for the budget – usually in the tens of millions of dollars – doesn’t match the long-term damage to the pension system.
An early retirement incentive plan (ERIP) means many workers who normally would be working – and paying into the pension system – instead are retired, and drawing funds out of the system.
This loss is compounded year after year, since it also means the pension system has fewer dollars to earn investment returns.
Retirement incentive programs, though controversial, nonetheless were a popular choice among prior governors and legislatures to cut personnel costs during tough fiscal times, having been offered five times since 1989. A sixth – estimated to save about $88 million – would have been made available in 2010 had state union leaders accepted a proposal from then-Gov. M. Jodi Rell.
But things have changed since then.
A 2010 panel launched by the Rell administration to study the cost of state employee retirement benefits warned that workers had come to anticipate these periodic incentive deals and often delayed their retirement plans to take advantage of them.
Malloy pressed the unions and legislature in 2012 to reverse contract language established in the mid-1990s that had allowed the state to defer a portion of its annual contributions to state employees’ pension system.
This deferral plan had effectively saddled the pension system with the equivalent of a balloon-mortgage. If not addressed, the state’s annual pension contribution would have more than quadrupled by the early 2030s.
Even under the governor’s pension fix, Connecticut’s payments rise quickly for at least a decade before stabilizing.
Union leaders also have been wary of early retirement incentive programs.
Besides the cash drain on the pension fund, they have said, early retirement programs also take a toll on agency staffing levels. And labor leaders have argued in recent years that several departments, including Social Services, Transportation, Correction and Labor, are under-staffed in key areas.
Larry Dorman, a spokesman for Council 4 of the American Federation of State, County and Municipal Employees – one of the largest state employee unions – noted Tuesday that the bulk of this year’s annual pension contribution is not needed to cover the benefits for current state employees.
According to Comptroller Kevin P. Lembo, about 82 percent of the $1.5 billion contribution in this year’s budget will help cover past contributions Connecticut failed to make, as well as the corresponding investment earnings it never received.