Future payment scheme takes a heavy present toll on state pension fund

State officials were shown the stark consequences Thursday of a new plan to defer making billions of dollars in state pension contributions until after 2032.

The latest valuation of Connecticut’s state employee pension fund, which assumes the plan pending before the legislature would be ratified, shows it would push the fund into its worst fiscal shape in three decades.

The State Employees Retirement System would have enough assets to cover just 35.5 percent of its long-term liabilities, marking the first time it has dipped below the 40 percent mark since the late 1980s.

Gov. Dannel P. Malloy announcing a new plan for state pension contributions in December.

mark pazniokas / ctmirror.org

Gov. Dannel P. Malloy announcing a new plan for state pension contributions in December.

Two years ago the fund was dangerously low with a 41.5 percent funded ratio. Fund analysts typically cite 80 percent as a healthy ratio.

But Gov. Dannel P. Malloy’s administration, which negotiated the deal, said the alternative remains worse – to attempt to pay annual pension contributions that otherwise might quadruple over the next 15 years.

The actuarial analysis prepared by Cavanaugh Macdonald Consulting of Kennesaw, Ga., attributes the latest decline largely to a new plan to restructure the state employee pension system to limit spiking state contributions over the next 15 years. To do that, Connecticut would shift at least $13.8 billion in costs into future taxpayers, and possibly more.

The report also showed that despite Malloy’s efforts to shrink the state’s workforce, the number of pension fund participants has grown, both in number and in average pay, over the past four years.

The new report “validates the concerns we have been raising about the SERS system for some time and speaks to the necessity of the agreement we reached with SEBAC (State Employees Bargaining Agent Coalition) last month,” Chris McClure, spokesman for Malloy’s budget office, said Thursday.

The administration, citing a study prepared by the Center for Retirement Research at Boston College, has warned that the annual pension contribution of nearly $1.6 billion could top $6.6 billion by 2032.

The deal Malloy struck with unions allows Connecticut to reduce its contributions between now and 2032 by billions of dollars, trying to keep annual costs closer to $2.3 billion in peak years. But that also means the state also can expect less in investment earnings for the pension fund over that period.

The valuation prepared by Cavanaugh Macdonald, correspondingly, reduces the total amount of assets the fund can anticipate receiving over the coming decades, which contributes to the worsening funding ratio forecast.

McClure noted that the new agreement also reduces the assumed annual return on fund investments from 8 percent to a more conservative 6.9 percent.

“Now that we are measuring our pension commitments using a more realistic investment return assumption, our valuation more accurately portrays the serious state of our underfunding,” he said.

Senate Minority Leader Len Fasano and House Minority Leader Themis Klarides.

Keith M. Phaneuf / CTMirror.org

Senate Republican Leader Len Fasano and House Minority Leader Themis Klarides.

Connecticut’s pension fund suffers from inadequate savings policies that date back more than seven decades.

State government saved nothing between 1939 and 1971 — and very little until the early 1980s — to cover pensions promised to state employees. Even after it began saving in earnest, it frequently contributed less than the full amount recommended between the early 1980s and 2011.

The cost of these past actions can be seen in the current budget and in future projections.

For example, 82 percent of this year’s $1.57 billion payment into the state employees’ pension fund, almost $1.3 billion, is to cover contributions or investment earnings not made or achieved in the past.

The funded ratio for the state employees’ pension stood at 45 percent in 1988 when the comptroller’s office began listing it in its Comprehensive Annual Financial Report.

But a statistical and historical analysis of Connecticut’s pension funds prepared in 2014 by the Center for Retirement Research reported the funded ratio was below 40 percent for most of the 1980s right up until it hit the 45 percent mark in 1988.

“The valuation of state employee pensions has hit an all-time low, and the unfunded liability grows every day,” House Minority Leader Themis Klarides said. “This is not a question of the state putting more money into the account; we must overhaul the entire system before it goes broke.”

Senate Republican President Pro Tem Len Fasano of North Haven also said the report demonstrates the need to make several pension reforms Senate and House Republicans have been pushing for during the past few years.

These include prohibiting overtime and travel-related compensation from being included in pension calculations, as well as boosting required worker contributions into the system.

“These are small changes that we could make that are reasonable and prudent,” he said. GOP lawmakers also proposed a three-year employee wage freeze in their 2016 budget package.

The new report also showed that there are 2,151 more active state employees participating in the pension system than there were in 2012, even though the Executive Branch, excluding higher education, employs 9.4 percent fewer workers than it did before Malloy took office in 2011.

Over the past five years, the state has made it easier for higher education workers to transfer from a 401(k)-style defined contribution retirement plan into the pension fund.

The report also found, though, that the average salary of active state employees participating in the pension system has grown by 6.6 percent over the past two years, from $69,785 per year to $74,387.

“We can spread out the liability costs for a number of years as the governor has done and make sure the state puts in enough money to cover current obligations, but a major overhaul is critical to ensure the viability of this system,’’ Klarides added.

Both Klarides and Fasano have said the legislature needs to go on record and vote on the pension restructuring deal that was negotiated between the Malloy administration and state employee unions.

Under existing rules, the legislature can adopt worker contract amendments and arbitration awards without voting to do so. Such contracts are deemed approved if, within 30 days of their filing with the House and Senate clerk, they have not been rejected by either chamber.

The 30-day clock began ticking on the new pension agreement on Wednesday, the opening day of the 2017 General Assembly session.

“We need to get very serious and start talking, bipartisanly, about this issue,” Fasano said, adding the Malloy administration and unions must share all information related to the deal with the legislature’s nonpartisan analysts. “We can’t be doing any of this blind,” he said.

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