A new report showing that funds for state workers’ retirement benefits are still being kept in the cash pool used to pay operating bills intensified the partisan debate Friday over Connecticut’s fiscal health.

The legislature’s nonpartisan Office of Fiscal Analysis noted that nearly $50 million set aside for retiree health care — half of which was contributed by employees — currently earns 1/10th of 1 percent in annual interest in the common pool. But the most recent actuarial analysis for the retiree health care trust fund calls for average investment returns of 5.7 percent over the next few decades.

And while minority Republicans in the legislature, who asked OFA for the analysis, argued it further underscores the state’s weak fiscal position, Gov. Dannel P. Malloy’s budget director argued that the arrangement is allowed by contract, and acceptable in the short term.

“Could we do a better job investing those funds? Yes,” said Office of Policy and Management Secretary Benjamin Barnes. But given that the trust fund is relatively young compared with decades of state government failing to save anything for workers’ retirement benefits, keeping the funds in the common cash pool “is a reasonable decision in this period of transition.”

At issue is an OFA report that notes that the state’s early efforts to reverse decades of failing to save funds for retiree health care benefits are not producing big investment earnings.

That’s because those worker contributions are kept in the same fund that includes the state’s roughly $550 million appropriation to cover this year’s retiree health care costs. And even though Treasurer Denise L. Nappier reported Friday that this fund “currently has a negative cash balance of $13.6 million” — which means that retiree health expenses have exceeded appropriations and employee contributions as of this point in time — Barnes said the funds are “segregated” and safe.

As allocations to the fund from other sources increase and more cash becomes available, Nappier added, “my office will be prepared to employ a long-term investment strategy. Until then, any fund assets will continue to be maintained in the common cash pool with any positive balances earning interest at the common cash pool rate.”

But Republicans on the legislature’s Finance, Revenue and Bonding Committee said the Democratic governor and treasurer won’t acknowledge that workers’ contributions could be locked into long-term investments — and earn higher interest rates than 0.1 percent — right now, if the state’s fiscal position was better.

That cash pool has been the source of controversy at the Capitol since January. That’s because minority Republicans in the General Assembly have warned that the state’s cash pool has been dangerously low throughout much of the calendar year, despite more than $1.5 billion in state tax increases enacted in May 2011 to help balance the budget.

“The cash flow is the window to how we’re performing,” Rep. Vincent Candelora, R-North Branford, one of the most vocal critics of how the cash pool is handled, said Friday, adding that keeping funds for workers’ benefits in the pool “should give us grave concern.”

Sen. Andrew W. Roraback of Goshen, the ranking GOP senator on the finance committee, said the findings in the OFA report shows the state “breaks faith not only with future retirees, but with the people of the state of Connecticut.”

“I wish I could say I was surprised this is happening,” added Rep. Sean Williams of Watertown, the ranking House Republican on the finance panel.

Nappier notified the legislature earlier this month that her office has temporarily transferred funds away from capital project accounts at four different times this calendar year to help the state cover its operating bills on time.

And though Nappier also wrote on June 1 that total available cash remains “adequate” right now, she added that pressures on the state’s cash flow continue to mount.

“The common cash pool balance has fallen substantially during the year,” she wrote June 1 in her last monthly report to the finance committee. “…The common cash pool is trending downward over time and the need for temporary transfers or other resources is growing.”

There has been a “significant decline” over the past 12 months, Nappier wrote. The balance stood at $121 million May 26, down from $895 million at the same point in 2011.

Weekly disbursements from the entire common pool average approximately $540 million, according to the treasurer’s office.

The Democratic co-chairwomen of the finance committee, Rep. Patricia Widlitz of Guilford and Sen. Eileen Daily of Westbrook, said they would analyze the OFA report and declined further immediate comment.

Both sides of the cash pool debate concede state government won’t overcome its history of poor savings habits overnight.

Connecticut has $17.9 billion in long-term obligations to provide retiree health coverage. The $50 million saved through June 30, 2011, represents less than one-third of 1 percent of that obligation.

The state had saved nothing until the 2007 legislature and then-Gov. M. Jodi Rell launched a trust fund using $10 million in budget surplus.

A 2009 union concessions deal negotiated by Rell made another $14.5 million deposit and called for employees with five years of experience or less to contribute 3 percent of their annual pay toward their retirement health care. That last provision pumped $25.1 million into the fund through mid-2011.

A second union concession deal, negotiated by Malloy and ratified by unions last August, required all state employees to contribute 3 percent of their annual pay to the retiree health care savings account, and requires the state to match those contributions starting in 2017.

The 2011 deal also states that “the trust fund shall not be used to pay the retiree health care costs of any employee already retired prior to the effective date of this agreement.”

It adds that this obligation “shall be permanent and irrevocable.”

The OFA report also cites this aspect of the 2011 deal and adds that “investment options are being discussed which would involve removing the funds from the treasurer’s common cash pool and placing them in an irrevocable trust as required by the revised 2011 SEBAC agreement.”

But Barnes added that he thinks the state is in full compliance with that agreement now, adding that while the funds may not be earning a major return right now, they are segregated and protected.

The chief negotiator for the State Employee Bargaining Agent Coalition, the group that negotiates benefits for unionized state employees, Hartford attorney Daniel Livingston, wrote that “The Malloy administration has assured us they have been and will continue to comply with the retiree aspects of the 2011 SEBAC agreement, including the (retiree health care trust fund), and we will continue to monitor the situation.”

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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