Borrowing ruled out as pension fund fix

State legislators and Gov. M. Jodi Rell used the state’s credit card just two years ago to shore up Connecticut’s long under-funded pension program for teachers.

But with the current economy slow to recover and nearly $2 billion in borrowing ordered since June 2009 just to cover government operating costs, the state panel created to propose solutions to the huge funding gaps facing state employees’ pension system has taken borrowing off the table.

Pension bonds “are certainly a risky proposition,” Michael J. Cicchetti, chairman of the Post Employment Benefits Commission, said. “Things are different now than they were then.”

In this case, “then” was May 2007, the recession was nearly one year away, and state government was enjoying a record $1.06 billion preliminary surplus for the fiscal year.

The legislature and Rell backed a plan developed by state Treasurer Denise L. Nappier and then-House Speaker James A. Amann, D-Milford, to borrow $2.28 billion for the teacher’s pension fund.

Though Connecticut would pay annual interest of 5.88 percent over the 25-year bond period, Nappier said she believed the Teachers’ Retirement Fund had been enjoying an 8.5 percent return rate on its long-term investments.

The problem, Cicchetti and others say, is that Connecticut no longer can safely assume the math will work in its favor.

“I’m glad we did what we did in 2007 because it was the right time,” Sen. Eileen Daily, D-Westbrook, co-chairwoman of the Finance, Revenue and Bonding Committee. “But it would not be anywhere near the top of my list” in the 2011 legislative session.

“We know we have to do something about the (state employees’) pension fund, but can we do something big like that now? I don’t think we can,” said Sen. Tony Guglielmo of Stafford, ranking Senate Republican on the finance panel’s Bonding Subcommittee. “With revenues as bad as they are we are having trouble keeping up with current expenses.

State Comptroller Nancy Wyman certified a $63.4 million deficit for the current fiscal year on Sept. 1, and the legislature’s nonpartisan Office of Fiscal Analysis is projecting a $3.37 billion shortfall – a level equal to 18 percent of current spending – for 2010-11.

Both Guglielmo and Daily also noted that Connecticut, with more than $19 billion in bonded debt, ranked second among all states in bonded debt per capita last year.

That problem was exacerbated in June 2009 when Rell and lawmakers agreed to close a $1 billion budget deficit with borrowing – despite there being nearly $1.4 billion in the state’s emergency reserve at that time – so the full reserve could be used to avoid further tax hikes or spending cuts in 2009-10 and in the current fiscal year.

The governor and legislature also authorized another $955 million in borrowing to prop up the current $19.01 billion budget, though officials now estimate between $650 million and $700 million will be needed because of slowly recovering tax revenues.

Guglielmo added that huge borrowing ordered to avoid making tough budget decisions, coupled with excessive borrowing for urban development initiatives and new school construction, have left the state with too little flexibility. “We did all of this borrowing and really got no return,” he said.

Nappier hasn’t taken any position on the prospect of borrowing to support the state employees’ pension fund. Christine Shaw, Nappier’s director of government relations and a member of the Post Employment Benefits Commission, said the office was asked to provide some research on the bonding option for the commission, but added that the economic conditions clearly are different than those of three years ago.

And while there was a strong lobby from Connecticut teachers three years ago in support of the bonding, state employees are not making a similar push now, focusing instead on trying to block proposals to pare down pension and other retirement benefits.

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. Actuaries typically cite 80 percent as a fiscally healthy ratio.

Cicchetti, Rell’s deputy budget director, unveiled a plan last month to shave $300 million off annual retirement benefit costs by boosting worker contribution rates, raising retirement ages and developing a new 401(k)-style retirement plan for new employees.

“We know the circumstances aren’t the same now,” veteran state union leader Salvatore Luciano, who serves on the Post Employment Benefits Commission, said Wednesday.

But he added that the state employees’ fund was weakened by years of insufficient state contributions, and reversing that mistake from this point forward is the way to fix it.

A study completed earlier this year by the Washington, D.C.-based Center for State and Local Government Excellence reached a similar conclusion as some Connecticut officials about turning now to pension obligation bonds.

“POBs have the potential to be useful tools in the hands of the right governments at the right time,” it wrote, adding that they can allow states and municipalities in good fiscal shape to bolster a pension program with a modest gamble that they can earn more investment income with the bond proceeds than they owe on their debt. “Unfortunately, most often POB issuers are fiscally stressed and in a poor position to shoulder the investment risk. As such, most POBs appear to be issued by the wrong governments at the wrong time.”