Report: Connecticut was among nation’s worst at saving for public benefits
With states’ savings for employee retirement benefits at an all-time low, Connecticut ranked among the worst of the worst in 2010, according to a new report this week from the Pew Center on the States.
Reeling from recession-driven investment losses, a pension raid to prop up state finances and a history of not saving for retiree health care, Connecticut government had more than $71 billion in liabilities and less than $24 billion set aside to cover them two years ago.
And though Gov. Dannel P. Malloy has launched initiatives to limit retirement benefits and to increase state contributions, the challenge could grow should Connecticut join other states in recognizing the likelihood of fewer investment earnings in the future.
“States continue to lose ground in their efforts to cover the long-term costs of their employees’ pension and retiree health care,” the Washington, D.C.-based center, a nonprofit public policy think-tank, wrote in its latest report.
There is a $1.38 trillion gap between the total pension and retiree health care liability facing states and their respective municipalities, and the funds they have set aside to meet them. Of that figure, $757 billion was for pension obligations, and $627 billion was for retiree health care.
That’s up 9 percent from the gap states faced in 2009, and 38 percent higher than the 2008 margin.
The latest report notes that “many experts say that a healthy pension system should be at least 80 percent funded.”
More than half of the states were 100 percent funded in 2000, but by 2010 only Wisconsin hit that mark, while 34 percent were below the 80 percent threshold.
Connecticut ranked the worst, along with Illinois, Kentucky and Rhode Island, in 2010.
The Nutmeg State had assets to cover just 53 percent of its $44.83 billion pension liability in 2010, the report states. Connecticut manages pension funds to serve judges, other state employees and public school teachers.
And while just seven states had funded 25 percent or more of their retiree health care obligations, Connecticut, which effectively had saved nothing, was one of 22 states cited in the report as a “serious concern.”
Connecticut, which faced a $26.7 billion retiree health care liability in 2010, had created a savings fund with $10 million in surplus in 2007.
And a 2009 union concessions deal reached with then-Gov. M. Jodi Rell also called for employees with 5 years of experience or less to contribute 3 percent of their annual pay toward their retirement health care.
But those changes didn’t even cover one-half of 1 percent of the health care liability in 2010.
Malloy, who inherited the problem when he took office in January 2011, already has taken attacked it on several fronts.
A second concessions deal reached with unions in August 2011 made several changes to the state employees’ pension fund, the worst-funded of all state-run pensions.
That concession plan raised regular retirement ages for several employee classes, increased penalties for early retirement, modified cost-of-living adjustments to pensions and offered a new hybrid retirement program.
Malloy also secured both legislative and union approval this year to reverse decades’ worth of under-funding to the cash-starved state employees’ pension program.
The state legislature’s nonpartisan Office of Fiscal Analysis reported in January that it thinks the pension fund will gain about $3.6 billion over the next two decades. It attributed about $1.7 billion of that gain to the concessions, with the rest produced by a rebounding stock market.
Under the Democratic governor’s plan, state government would make an extra $3 billion in pension payments between next fiscal year and 2023. After 2024, the contribution would drop annually. Over the course of the next three decades, Connecticut would save an estimated $5.8 billion, though most of that savings wouldn’t come until the last of those three decades.
The concessions deal also required all state employees to contribute 3 percent of their annual pay to the retiree health care savings account, and requires state government to match those contributions starting in 2017.
An actuarial report prepared by The Segal Co., and released last month by Comptroller Kevin P. Lembo, projected the state’s retiree health care liability at $17.9 billion unfunded liability, down from $26.7 billion.
It attributed $4.94 billion in reductions to concessions and other changes to health care benefits, including changes in benefit design, eligibility requirements, contributions from employees and retirees, the creation of a wellness program and changes to prescription drug coverage for Medicare-aged beneficiaries.
Republican state legislative leaders have asked the nonpartisan OFA to analyze that actuarial report.
Still, Connecticut’s long-term liabilities could grow — at least on paper — if it follows a growing trend among states.
Most states, according to Pew, assume an 8 percent average annual return on investments of their pension and retiree health care savings funds over a 30-year period.
For example, Connecticut assumes an 8.25 percent return on its pension fund for state employees, and 8.5 percent on the pension program for teachers.
But Pew noted in 2011 that “there is significant debate among policy makers and experts about what discount rate is most appropriate for states to use when valuing pension liabilities.”
In its latest report, the center wrote that after losing an average of 25 percent of their pension funds’ values during the stock market plunge of 2008, and then regaining just 21.6 percent through 2011, many states are debating whether to pull their assumptions below 8 percent.
Rhode Island lowered its pension assumptions to 7.5 percent last year, and an actuary for New York City recommended dropping assumptions for the city’s pension funds to 7 percent.
But that comes with a political price. Assuming a lower return increases the unfunded liability — the gap the state must fill with contributions — over the coming decades.
“I understand why people think 8.5 percent might be high,” Malloy’s budget director, Office of Policy and Management Secretary Benjamin Barnes, said Tuesday. “I certainly think it’s reasonable to consider” lower earnings assumptions.
But Barnes said those assumptions reflect potential earnings over 30 years or more, and shouldn’t be driven by one recession or one recovery — let alone partisan politics reflecting those relatively short periods in the fiscal life of a pension fund.
“These are extremely long-duration financial instruments,” he said, adding that regardless of what assumption is made, Connecticut’s financial situation only can improve by making the tough choices the Malloy administration has embraced. And that means reforming benefits and improving savings habits.
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