Budget chief calls for legislature to tackle cash-starved pension system

Now that state legislators have closed the largest budget deficit in Connecticut history, Gov. Dannel P. Malloy’s administration has a new challenge: Fix a state employee pension system on a collision course with fiscal collapse in about two decades.

Office of Policy and Management Secretary Benjamin Barnes, Malloy’s budget chief, presented the challenge Tuesday to the legislature’s Appropriations and Finance, Revenue and Bonding committees during OPM’s annual budget briefing. And though he didn’t propose a specific timetable to meet the challenge, it could ultimately add hundreds of millions of dollars in costs to the annual state budget.

“There is enormous work left to be done with respect to the fiscal condition of the state of Connecticut,” Barnes told lawmakers as part of his office’s Fiscal Accountability Report, an annual briefing on short- and long-term budget issues.

“State government is leaner and more efficient” as a result of the $1.6 billion concessions deal ratified in August with state employee unions, as well as other spending cuts, agency mergers and efficiencies ordered in the $20.14 billion budget adopted in June, Barnes said.

But he also noted that the governor, who took office in January, inherited a financial picture plagued with more than $71 billion in long-term debt — one of the highest burdens, per capita, of any state in the nation.

That includes: bonded debt stemming largely from school construction, roads, bridges and other capital projects; pension funds and health care benefits for retired state workers and teachers.

Among the pension funds, the program for state employees is in the worst shape.

According to the last actuarial valuation, the fund had reached a 22-year low, as of June 30, 2010.

State government had $9.35 billion in assets in the pension fund as of mid-2010, but it owes $21.1 billion. Together, these 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.

Barnes noted that state government has failed to reach healthy funding levels in its employee pension program for most of its history.

How the problem began

Connecticut’s pension fund began as a pay-as-you-go system. For nearly four decades, state government put nothing away, and therefore gained no investment earnings, to help cover pension costs.

Annual contributions into the pension fund, 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.

Another huge wrench was thrown into the fiscal works in 1995, when then-Gov. John G. Rowland and employee unions agreed to put the pension program on what amounts to a balloon mortgage schedule.

The two sides agreed to abandon a pension fund contribution schedule that required largely equal payments, with annual inflationary adjustments, over the next 30 years to eliminate the unfunded liability.

In its place they imposed a system of ever-escalating payments. Although payments were lowered in the short-term, they have been increasing dramatically since the late-1990s.

The state’s annual contribution to the pension fund, which stood at $844 million last year and tops $1 billion this year, is on pace to hit $1.5 billion in 2022, top $2 billion by 2027, and approach $4 billion by 2032, according to OPM.

“It gets spectacularly ugly,” Barnes said, adding that it’s time for the administration and legislature to search for a way to shift from the “back-weighted system” and move “toward more level funding.”

Barnes didn’t offer specific proposals Tuesday, though he made it clear that this can only be resolved over the long term.

A 2010 panel formed by then-Gov. M. Jodi Rell to propose solutions to the huge funding gaps facing retirement benefit programs ordered an analysis that concluded that the state would have had to add an extra $550 million to its annual pension contribution last fiscal year to get the pension system back on a level-funding schedule.

But Malloy’s budget chief did make it clear that he thinks there is only one solution that will solve most of the problem: dedicating money to meet the state’s responsibilities.

“The only way to solve long-term structural liabilities is to pay them off,” he said, adding that the sooner Connecticut addresses this problem, the more progress it will make. That’s because larger contributions to the pension fund will increase investment earnings, which in turn will be reinvested and produce more income for the pension system in future years.

Sen. Eileen Daily, D-Westbrook, co-chairwoman of the finance committee, said the administration made progress reducing Connecticut’s pension fund issues during the August concessions deal. The savings negotiated in that deal are being assessed by actuaries who are expected to issue a report in late December.

But Daily said most state officials who have looked honestly at the pension obligations would come to the same conclusion that Barnes did.

“I think Mr. Barnes made clear what we know: that we have to do this,” Daily said, adding that Connecticut’s benefits contract with the State Employees Bargaining Agent Coalition extends through 2022.

But Sen. Robert Kane of Watertown, ranking Republican senator on the Appropriations Committee, said Connecticut might have been able to cut its pension costs even further in 2017 — when its benefits contract with unions originally was set to expire — had Malloy not agreed to extend it five years to get other concessions.

“I’m glad to see the administration is focusing on our long-term liabilities because sooner or later we’re going to collapse under the weight of them,” Kane said. “But I think we really missed an opportunity for major structural reform.”

SEBAC had no immediate response Tuesday afternoon to Barnes’ statements.