A 1995 decision to cut short-term pension costs has come back to haunt officials trying to bring fiscal stability to retirement benefits.
To achieve immediate savings back then, state officials and public employee unions agreed to put the state employee pension program on what amounts to a balloon mortgage schedule.
As a result, the state’s annual pension contribution, which currently stands at $844 million, is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on actuarial consultants’ estimates prepared for the Post Employment Benefits Commission.
The panel, which was created to propose solutions to the huge funding gaps facing retirement benefit programs, also learned it would take a nearly $550 million contribution increase next fiscal year to get state government back on a level-funding schedule that would keep contributions relatively stable over the next 30 years.
“We’re dealing now with decisions that were made 10 and 15 years ago, and many people aren’t happy with them,” Michael J. Cicchetti, Gov. M. Jodi Rell’s deputy budget director and the commission chairman, said Tuesday of the arrangement agreed to in 1995 and 1997 by then-Gov. John G. Rowland, the legislature and state union leaders. “It’s so back-loaded and it’s going to put the state in tremendous pain in the next 10 or 15 years if we don’t do anything.”
“I think it’s fair to say we made a bigger dent in covering our debts with the level-funding” used prior to 1995, Hartford lawyer Daniel E. Livingston, longtime negotiator for the State Employees Bargaining Agent Coalition, said, adding unions were under heavy pressure from the Rowland administration to cut pension costs.
Connecticut still was recovering from the recession of the early 1990s when Rowland, a former 5th District congressman, took office.
The GOP governor, who campaigned on a pledge to cut taxes, made good on that promise, signing into law several new sales and corporation tax exemptions and a major new credit within the income tax in his first two years.
To help balance state finances while making these cuts, Rowland asked state employee unions for concessions. The talks produced agreements in 1995 and 1997 that combined to change pension funding dramatically.
State government, which had used no investment earnings to supplement its pension contributions for more than four decades, changed that in the early 1980s, but had only begun to reverse the damage when Rowland took office.
According to the state comptroller’s annual report in 1996, the pension system had enough funding to meet 55 percent of its obligations. Actuaries typically cite a funded ratio of about 80 percent as healthy.
The state tries to close that gap each year with an annual payment designed to fulfill two purposes: Meeting the “normal cost,” or saving to cover the benefits earned by workers during the year; and making up – over a 30-year schedule – for the dollars Connecticut should have saved in decades past to meet its obligations.
Still, the Rowland administration and the state worker unions agreed in the mid-1990s to abandon a pension fund contribution schedule that required largely equal payments over the next 30 years to eliminate the unfunded liability.
In its place they imposed a system that mandated a level percentage of the annual payroll be contributed. This lowered payments in the short-term, then increased them over time to account for inflation.
According to the comptroller’s 1996 report, it saved the Rowland administration $255.6 million in the first year of the new deal.
This back-loaded system is acceptable under Governmental Accounting Standards Board rules. But because of its back-loaded nature, it is problematic for states that raid their pension funds in one way or another.
“That’s been our problem for too long,” said Rep. Vincent J. Candelora of North Branford, ranking House Republican on the Finance, Revenue and Bonding Committee. “We have an amazing lack of focus on debt in state government and we have no one to sound the alarm when we have issues.”
State government has a history of offering retirement incentive programs to cut payroll during tough fiscal times. Rowland and the legislature enacted one in 2003, and Rell and the current General Assembly did so in 2009.
The theory behind these retirement incentives is simple: Senior workers retire sooner than they planned – relieving the state of their higher salaries – and some are replaced with lower-paid hires.
But critics have argued that the savings from these programs are an illusion, and that any short-term reduction in salary costs is eventually offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.
For example, each new retiree has stopped – earlier than planned – paying into the pension system. Workers are required to contribute, but retirees are not. That same person also has begun drawing benefits sooner.
Governors and legislators also have received union permission, both in 2009 and 1991, to reduce required payments into the pension fund during fiscal crises – even though the actual benefits that must be paid out are not reduced.
The 2009 concession package negotiated by Rell and ratified by the legislature defers more than $314 million in total fund contributions between 2009 and the current fiscal year.
State government actually has lost ground since the mid-1990s in its battle to stabilize the pension fund.
According to its last, full actuarial valuation in 2008, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion, an amount equal to 52 percent of its liability.
Livingston said Tuesday that state employee unions faced considerable pressure from the Rowland administration to provide concessions in the mid-1990s, and the change in pension program funding was a better alternative than reductions in benefits.
“We felt the sooner the state caught up with its obligations, the better off it would be,” Livingston said, adding that while union leaders made a concession then, it was at their insistence in the early 1980s that pension savings began in the first place. “But we had already made a very substantial improvement.”
Reginald L. Jones, a former GOP state legislator from Darien and Rowland’s first budget director, died last year. Jones’ successor, Michael W. Kozlowski of Granby, who oversaw the 1997 labor deal, could not be reached for comment Tuesday.
State Treasurer Denise L. Nappier and Comptroller Nancy Wyman, both of whom have representatives on the Post Employments Benefits Commission, have said the state could mitigate its pension problems by avoiding more fiscal gimmicks that drain the program, and by depositing future budget surpluses into the fund.
The Rell administration offered a plan last month to shave $300 million off annual pension costs by boosting worker contribution rates, raising retirement ages and developing a new 401(k)-style retirement plan for new employees.
Nappier challenged those estimates Tuesday in a letter to Rell, noting her office still hasn’t received any detailed cost analysis.
Cicchetti said he believes that with changes like these and others, state government can gradually shift back to a level-funded program over the next few years, and develop a stable plan to meet its pension obligations.
“If you tighten the benefits and structure things differently, you can get back to within the realm of possibility,” he said. “But it’s going to require some pain to get there.”