The state’s pension fund now holds less than 45 percent of the funds its needs to meet obligations to workers, plunging below the halfway mark for the first time in more than two decades, according to the latest, biennial report from fund analysts.

The actuarial valuation prepared by Cavanaugh Macdonald Consulting of Kennesaw, Ga., also found that while fund investment earnings rebounded over the last year, they could not overcome significant losses from 2009, coupled with various pension-weakening gimmicks ordered to prop up the state budget.

And that analysis, which covers the fund’s history through the end of the last fiscal year on June 30, doesn’t even address another $100 million pension contribution that is being deferred in the current year.

The state’s annual pension contribution, which currently stands at $844 million, is projected to grow just beyond $1 billion next year.

And even if that is met, the contribution is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on a consultants’ report issued earlier this year for a state panel studying retirement benefits.

“We know we have to get things back on track,” Rep. John Geragosian, D-New Britain, co-chairman of the legislature’s Appropriations Committee, said Thursday. “This is one of many challenges that we have to begin dealing with in the next session.

State government had $9.35 billion in assets in the pension fund as of June 30, compared with $21.1 billion in obligations, which together represent a funded ratio of 44.4 percent. Actuaries typically cite a ratio of 80 percent as fiscally healthy. The last time the ratio hovered close to 45 percent was in 1988.

The ratio, which peaked at 63 percent in 2001 and has declined gradually since, stood at 52 percent in June 2008, according to previous actuarial reports.

But the slipping accelerated over the past two years as Connecticut and the nation plunged into recession.

Investment earnings, which fell by $1.7 billion in the 2008-09 fiscal year, were partially offset by an $825.8 million gain in 2009-10.

But problems on Wall Street weren’t the only problem the pension fund faced.

A May 2009 concession deal negotiated by Gov. M. Jodi Rell and ratified by state employee unions and the General Assembly deferred $214 million in pension contributions over the past two fiscal years, and allowed another $100 million deferral this year.

That deal also allowed the state to offer a retirement incentive program in 2009, which increased pension benefits for about 3,800 eligible employees.

Though popular among workers, these incentive programs have been criticized by economists, legislators and some union leaders for providing illusory savings, offering a short-term reduction in salary costs that eventually is offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

And retirement data shows state employees tend to defer their retirement plans to take advantage of these lucrative incentive programs.

State government has offered five retirement incentive programs in the past two decades, providing them in 1989, 1992, 1997, 2003 and 2009.

According to records from Comptroller Nancy Wyman’s office, retirements since 1987 have averaged 738 workers in years without incentives, and 4,285 in years with them.

Connecticut’s pension fund has been struggling to reform a pension system that began as a pay-as-you-go system.

For nearly four decades, state government saved nothing, and therefore gained no investment earnings, to cover pension costs.

Annual contributions into a savings account, which began in the early 1980s, 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.

Veteran state union leader Salvatore Luciano said unions realized the pension fund really couldn’t afford either the contribution deferrals or the incentive program built into the concession package. But given Rell’s preference for social service cuts program over tax hikes, it was the least objectionable alternative, he said.

“They were looking at cutting lead (poisoning) screening for children,” he said. “Those were the kinds of choices we were making.”

Rell, who repeatedly has charged the Democrat-controlled legislature with being unwilling to consider substantial cuts to any segment of state spending over the past two years, declined to comment about the new valuation.

State Treasurer Denise L. Nappier, who oversees investments of pension funds, also declined to comment.

The State Employees Bargaining Agent Coalition, which negotiates health and retirement benefits for all state workers, rejected the administration’s proposal for another retirement incentive program this year.

“We don’t want to see public services harmed anymore,” SEBAC spokesman Matt O’Connor said Thursday adding that state unions also want restoring the fiscal health of the pension fund to be given high priority.

Though he has provided no details about what concessions he may seek from state employee unions, Gov.-elect Dan Malloy has said on several occasions that state government must reduce its reliance on fiscal gimmicks as its addresses the $3.67 billion deficit projected for the next fiscal year.

“This is another reminder of just how deep a hole our state is in,” Malloy said Thursday. “The news is grim, the decisions are tough and the sacrifices will be many in order to get Connecticut’s fiscal house in order.  But let me be clear: we will get there.”

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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