Report: Connecticut lags in tackling retirement benefit costs

Connecticut not only faces one of the largest funding shortfalls in its retirement benefit programs of any state in the nation, but has been one of the slowest to respond over the last two-and-a-half years, according to a new study from a nonprofit economic development group.

The Connecticut Regional Institute for the 21^st Century, a coalition of businesses and public institutions, also recommended a broad array of steps including increased government contributions toward retirement savings accounts, new restrictions on retiree benefits, an end to traditional retirement incentive plans that weaken pension funds.

Retiree health care and pension liabilities are “a fiscal tsunami heading right for Connecticut. Increasingly, towns and states are actually considering bankruptcy because of the huge liability associated with pensions and OPEB (other post-employment benefits,) the institute wrote.

Connecticut’s unfunded pension and medical liability approaches $42 billion. The overwhelming bulk of that liability involves a pension fund and retirement health care for state employees and a pension fund for public school teachers.

Annual contributions for those total more than $2 billion, or about 11 percent of the current state operating budget.

But since 2008, Connecticut has lagged behind most other states in trying to address long-term obligations that nearly double annual spending, according to the report.

State officials here have taken two steps since then to counter this problem:

• A 2009 concession deal with the State Employees Bargaining Agent Coalition required all new employees, and existing workers with less than five years of experience, to contribute 3 percent of their annual pay toward their retirement health care.
• That same deal also offered incentives to senior state employees to retire now. But while that move saved the state operating funds in the short-term, many economists argue that over the long haul, it increases pension payments and weaken pension funds. The institute report also recommends avoiding incentive programs in the future, effectively leaving Connecticut with just one affirmative step to mitigate its retirement benefit obligations.

“We’re near the back of the pack” of states in terms of fixing the problem,” Shelly Saczynski, United Illuminating’s director of economic development and a member of the institute’s steering committee, said Monday.

But Saczynski added there is a silver lining to Connecticut’s late start. It can benefit from analyzing the measures undertaken by other states and choosing those that have been most effective.

The most common step taken by other states to control the growth of employee pensions, according to the report, involves increasing the number of salary years analyzed to calculate that benefit. The most common shift was moving from a three-year average of an employee’s highest salaries – as Connecticut uses – to a five-year average.

States also instituted new restrictions to prevent “spiking” of pension benefits, such as limiting how overtime earnings could affect pension calculations. Increases in the minimum retirement age and reductions in cost-of-living adjustments also were common options, though lawsuits have been filed to protect COLA formulas in Colorado and Minnesota.

Vermont borrowed a page from the Connecticut state employee unions’ playbook, bolstering its teacher pension fund by increasing teachers’ benefits – if they work longer. Connecticut workers offered this proposal last year, but it was not accepted by Gov. M. Jodi Rell’s administration.

“The report is a bit embarrassing but not surprising,” state Comptroller Kevin Lembo said Monday, adding officials cannot use the mammoth-sized, $3.67 billion budget deficit projected for 2011-12 as a reason to postpone tough decisions even further.

“I can understand that reaction,” he said. “But next to a time of budget surpluses, a time of record deficits is precisely the right time to make structural changes.”

Deputy House Speaker Kevin Ryan, D-Montville, who co-chaired the legislature’s Labor and Public Employees Committee for the past eight years, also conceded that officials hadn’t taken reports of huge unfunded liabilities as seriously as they should have.

“I think in the past it was thought that we could get away with it,” he said. “I think people realize now we have to talk about it.

The institute study did endorse several restrictions or reduce benefits for Connecticut state employees or teachers, including:

• Increasing the age to retire with full benefits.
• Instituting the five-year salary average for pension calculations and an end to COLA adjustments
• And implementing a defined contribution plan, similar to the 401(k) plans offered in the private sector, for new employees.

Connecticut’s biggest liability involves its retiree health care. According to Lembo’s office, the state has $26.6 billion in unfunded liabilities tied to this benefit, and almost nothing saved to offset it. The legislature did set aside a token $10 million in 2007.

Currently, most state employees qualify for that health care when they retire provided they have 10 years of state service, even if they then leave for private sector jobs and retire decades later. State employees hired after July 2009 must meet two conditions: having 10 years of service and their age and years of service must total 75.

The report recommends that Connecticut move to a combination of 90, noting that many states now limit access to health benefits to those vested employees who remain in state service until their retirement.

But Saczynski noted that the report’s recommendations are not focused solely on restricting benefits. “It is not an issue of slash-and-burn,” she said.

Besides recommending contributing the full amount recommended annually to stabilize the state employees’ and teachers’ pension funds, the institute also called for Connecticut to reverse a controversial move taken in 1995 that put the state employees’ pension system onto a back-loaded contribution plan.

That deal, negotiated by then-Gov. John G. Rowland’s administration and state employee unions, moved Connecticut off a relatively level-funded plan to stabilize its worker pension system over 30 years.

The alternative system, which saved Connecticut $255 million back in 1996, has helped place the state’s annual pension contribution on a rapidly escalating schedule.

The annual contribution into the workers’ pension fund,, 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 issued last year. Consultants estimated it would cost an extra $550 million next year to return to a level-payment system.

Veteran state union leader Salvatore Luciano said unions believe government must start making its full pension contribution, and also support a return to a level-funded system.

But Luciano, who is executive director of the American Federation of State, County and Municipal Employees’ Council 4, said he doesn’t believe Connecticut is as far behind other states as the report contends. He specifically noted that Connecticut did establish a pension savings account back in the mid-1980s, when many other states still had not.