Retirement panel splits over pension cuts

The panel created by Gov. M. Jodi Rell to propose solutions to the huge funding gaps facing state retirement benefit programs fractured Thursday over the question of whether to recommend reductions to the current benefit system.

Veteran state union leader Salvatore Luciano and Christine Shaw, director of government relations for state Treasurer Denise L. Nappier, both argued such suggestions were premature and questioned whether the Post Employment Benefits Commission’s final report would be taken seriously by Connecticut’s next governor and legislature.

“I’ve always thought this was a solution looking for a problem,” Luciano, executive director of Council 4 of the American Federation of State, County and Municipal Employees, said.

As commission members discussed the long-term drain retirement incentive programs place on the pension fund, Luciano noted that the Rell administration canceled commission meetings for three weeks, starting in late April, when the governor was calling for the second incentive program in two years. The commission resumed meeting only after state unions rejected Rell’s request.

“You’ll have to excuse me if I am skeptical,” Luciano said.

Commission members received new cost-savings projections Thursday. Proposals to calculate pensions based on a five-year average of a worker’s top pay, rather than on three years as is currently done, could save as much as $17.4 million per year. Capping annual pension increases to reflect the cost of living at 1.5 or 2 percent could save between $16 million and $30.4 million per year, according to Cavanaugh Macdonald Consulting, a Kennesaw, Ga.-based actuary and health care consultant retained to study the effects of the 2009 incentive program on the pension fund.

The firm offered a preliminary analysis last month that estimated the state’s annual contribution to the pension fund would have to rise next year by $217 million, from $844 million to $1.06 billion.

But that report didn’t assess the fund’s overall investment earnings over the past two years – the single-largest factor affecting its stability – and Shaw questioned how any recommendations for benefit changes could be made responsibly without that data.

Full actuarial valuations–extremely detailed pension fund analyses and long-range forecasts–are only prepared every two years, and the next one isn’t due until November. That’s three months after the panel finishes its work and only about one month before Rell’s term ends. Further complicating matters, this valuation also will be the first report that assesses the impact of $314.5 million in pension fund payments that Rell and the legislature have deferred since 2009.

“To me it’s like I’m operating blind,” Shaw said, adding that the new governor and legislature likely won’t pay attention to a report based on incomplete information. “They’re going to say, ‘This was a Rell construct. That was her thing. We’re going to address this problem on our own.’”

The Republican governor, who is not seeking re-election, has been criticized by gubernatorial candidates from both parties for relying on nearly $3.6 billion in state emergency reserves, federal stimulus grants and borrowing to cover ongoing budget expenses this fiscal year and last.

The legislature’s nonpartisan Office of Fiscal Analysis estimated in May that the 2011-12 budget, the first one Rell’s successor must craft, faces a built-in shortfall of $3.37 billion.

Luciano has charged that Rell created the seven-member commission in February to deflect attention from fiscal loose ends she has left untied.

And Thursday he said that while the pension and health care programs state government offers its retirees face huge funding challenges, the problems largely were created by governors and legislatures who failed to save appropriately.

For more than two decades, state government and its employee unions routinely have agreed on annual government contributions to pension accounts far below the level recommended by fiscal analysts to cover current retiree expenses and begin saving to offset future costs.

According to its last, full actuarial valuation, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion, or an amount equal to 52 percent of its liability. Actuaries typically cite a funded ratio of about 80 percent as healthy.

Annual contributions to the fund are supposed to cover current costs for a system that includes about 53,000 workers and just under 40,000 retirees and to gradually erase the unfunded liability over a 30-year period.

Thomas J. Woodruff, director of healthcare policy for State Comptroller Nancy Wyman and a commission member, said that while the pension systems’ financial challenges are complex, “it’s the funding behavior (of state government) that trumps almost everything else.”

But other commission members from the Rell administration and the private sector argued that even without the benefit of a full actuarial report, it’s clear the system is rapidly growing beyond the state’s ability to pay.

“When, if not now, do we start paying attention to reality?” said Julie E. McNeal, an officer with the Connecticut Society of Certified Public Accountants. “I really don’t see how saying anything less than ‘Yes, this is a great big landfill before us’ is going to be helpful.”

Rell’s deputy budget director and commission chairman, Michael J. Cicchetti, said regardless of how state government got into its pension fix, it can’t assume the program’s future will be stabilized by better savings habits. “If history is any guide,” he said, “they won’t be in good shape.”

Cicchetti said the commission is scheduled to meet again next Thursday with the goal of submitting final recommendations to Rell in August.