The Northwestern University study concluding that the pension funds of Connecticut and 19 other states will be broke by 2025 is fundamentally flawed, failing to account for future contributions to cover unfunded liabilities, according to the National Association of State Retirement Administrators.
And state Treasurer Denise L. Nappier said Thursday that while Connecticut’s state employee pension fund has been “chronically underfunded” the state still is required through its benefits contract with worker unions to both meet annual costs and save for future liabilities.
The study, prepared by Professor Joshua D. Rauh of university’s Kellogg School of Management, estimated Connecticut would be one of the first seven states to run out of funding, reaching that point by 2019.
“Rauh’s financial analysis does not account for changes that have been made and undoubtedly will continue to be made, that reduce public pension liabilities and increase contributions from both employees and employers,” the association wrote in its analysis of the study. “Although we share Professor Rauh’s concern over the difficult financial situation that state and local governments face in the current economy, we do not believe his analysis or recommendations are helpful for addressing the situation.”
The association includes retirement fund administrators from all 50 states, four territories and from the District of Columbia.
Rauh could not be reached for comment Thursday.
At the heart of the disagreement is how states manage what is commonly referred to as a pension program’s “unfunded liability.”
For example, Connecticut’s pension fund had $19.2 billion worth of obligations, or liabilities that eventually must be paid, not only to just under 40,000 current retirees, but another 53,000 workers who also will eventually draw benefits, according to its last actuarial valuation. That report also found that fund had just under $10 billion, or an amount equal to 52 percent of its liability. Actuaries typically cite a funded liability of about 80 percent as a healthy ratio.
Annual contributions to the system are supposed to cover current retirement benefit costs and to build up a savings to gradually erase that unfunded liability over a 30-year period.
For more than two decades, governors and legislatures have routinely approved annual contributions during tough fiscal times far below the level recommended by plan analysts both to cover current retiree expenses and to offset future costs. Between May 2009 when Gov. M. Jodi Rell, state employee labor unions and the legislature approved a concession package, and the end of this fiscal year next June, $314.5 million in pension fund contributions will have been deferred.
But even with those deferrals, Connecticut’s annual contributions to its fund still covered more than just that year’s pension payments to current retirees.
Actuaries recommended a $944 million contribution for this fiscal year, with about $340 million going to cover current benefits. Even though the contribution was reduced per the concession deal to $844 million in the $19.01 billion overall state budget adopted in May, more than half of that appropriation would go toward future benefit costs.
“The state employees’ retirement fund has indeed been chronically underfunded, but based upon a collectively bargained agreement between the state and its unions, we are on a plan to pay up, over a period of time, for the past practice of not adequately funding the retirement system,” Nappier wrote in a statement released Thursday. According to a report prepared last month for a commission appointed by Rell to study the fiscal challenges facing the state’s retirement benefit system, the pension system would be fully funded by 2040.
The Northwestern University study also challenged the approximately 8 percent return on investments this state and most others typically count on in their projections. This reflects about three-quarters of the historical average growth of the stock market since 1927, Rauh argued in his study.
Connecticut assumed 8.25 percent in its 2008 actuarial analysis.
If Connecticut and other states assumed a more conservative, guaranteed rate, closer to the 3 percent a U.S. Treasury security would yield, Rauh wrote, their pension savings would be even more inadequate.
But Keith Brainard, research director for the association and one of the authors of its rebuttal to the Rauh study, said public pension funds with assets beyond $1 billion have a track record of their own that supports their assumptions. These funds have enjoyed a median return on their investments of 9.25 percent over the past 25 years, he said.
In February Rell formed the Post-Employment Benefit Commission, a panel of state budget and pension experts from management and labor charged with charting a long-term strategy to improve the system’s fiscal health.
Office of Policy and Management Deputy Secretary Michael J. Cicchetti, who chairs the commission, said after the Northwestern University study was released that it underscores the need to investigate a broad range of possible changes to a package of retirement benefits that critics of state government have called too generous. The changes Cicchetti asked the panel to analyze include shifting to a defined contribution system, requiring pension recipients to pay more for health care, and restricting access to health care for workers who leave state service before they reach retirement age.
Under current law, workers with 10 years of state service remain eligible for both a pension and health care even if they leave for other jobs before reaching retirement age.
Nappier cautioned in her statement against overreacting to the fiscal concerns facing the pension system.
The “Great Recession” and “uncertain recovery” will put added pressure on state and local governments to meet pension obligations, she wrote. “But the answer does not lie in reactionary policies that merely shift the financial burden from the government to individuals who have earned a benefit for a lifetime of public service.”
The State Employees Bargaining Agent Coalition, which negotiates health care and retirement benefits for all state employee unions in Connecticut, said the association analysis invalidated Rauh’s study, adding that suggestions like replacing state pensions with a defined contribution plan – similar to the 401 (k) commonly found in the private sector – does not make economic sense.
“We know that when taxpayers pay into a pension fund, they get a four-to-one return back into the economy as retirement income,” said veteran state union leader Salvatore Luciano, who serves both on the bargaining agent coalition and on Rell’s study commission. “Pensions are good for workers and they are good for the economy. Pensions are not the problem.”