One of the leading Wall Street credit rating agencies recently increased its focus the fiscal health of state pension systems when rating overall creditworthiness–at the worst possible time for Connecticut.

Moody’s Investors Service stopped short of saying when–or if–this might lead to a drop in credit ratings for particular states. But it defended the focus as a step toward a more thorough and accurate assessment of states’ fiscal conditions.

“Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios,” said Moody’s analyst Ted Hampton. “Presenting combined debt and pension figures offers a more integrated — and timely — view of states’ total obligations.”

Moody’s found Connecticut is one of four states, along with Hawaii, Massachusetts and Illinois, with the highest debt- and pension-funding needs.

Connecticut, which has more than $19 billion in bonded debt and has approved nearly $2 billion in borrowing since June 2009 to help fund day-to-day government operations, already received a bond rating downgrade from Fitch Ratings Services last year.

And in November, the state received an actuarial report showing its pension fund in its worst shape since the state began saving for pension obligations in the mid-1980s.

The state’s pension account held less than 45 percent of the funds needed to meet its obligation to workers in the biennial valuation released by Cavanaugh Macdonald Consulting of Kennesaw, Ga.

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 ratio, which stood at 52 percent in the 2008 valuation, plunged in part due to declining investment earnings during the most recent recession, a problem all states faced.

But the system also has been weakened by deferred contributions, retirement incentive programs and other actions by legislatures and governors to balance the annual budget. And the slippage accelerated over the past two years.

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 a May 2009 concession deal negotiated by then-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. State government has offered five retirement incentive programs in the past two decades.

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.

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

Further complicating matters, state employee unions agreed in 1995  with then-Gov. John G. Rowland to shift the pension contribution system from a level-funded 30 year schedule to a backloaded system that will force dramatic increases over the next few decades.

The required annual contribution is on pace to grow by 50 percent by 2017, double by 2026 and triple by 2038, based on a consultants’ report issued last summer for a state panel studying retirement benefits.

Gov. Dannel P. Malloy, who inherited a projected state budget deficit of $3.67 billion for the coming fiscal year when he took office on Jan. 5, announced shortly thereafter that the pension system could not be subjected to any more fiscal gimmicks. Malloy announced his pension fund policy before the Moody’s statement.

“He has been incredibly blunt and consistent: We cannot do stuff like that any more,” Roy Occhiogrosso, Malloy’s senior advisor, said Monday. “The governor has been quite clear about the need to get the state’s fiscal house in order due to issues just like this.”

Malloy chastised congressional Republicans and New Jersey Gov. Chris Christie during an editorial board interview with The Day of New London earlier this month, charging that talk of states declaring bankruptcy was fostering instability in the bond market.

State House Minority Leader Lawrence F. Cafero, R-Norwalk, said Malloy and all Connecticut officials need to be prepared for some frank discussions about the state’s huge debt.

“The first step in solving a problem, personal or otherwise, is to acknowledge the problem,” Cafero said Monday. “And for so long we have swept the problem under the rug. What it’s all really about is telling the truth — to ourselves and to the public.”

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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