The state employees’ union is calling on state legislators and Gov. Dannel P. Malloy to fix a glitch in the 2011 concessions deal that forces the public colleges and universities to spend millions of dollars more every year to bolster the cash-starved pension system.
“This was not part of the discussion. That was not the deal,” said Hartford attorney Dan Livingston, who represented the state unions in 2011 during their negotiations with the Malloy administration.
At issue are the nearly 900 employees of the University of Connecticut, Connecticut State Universities, the state’s community colleges and online Charter Oak State College who are switching from the state’s 401k-type retirement plan to the state’s pension system.
The state’s pension system is more attractive for many workers because it’s perceived as being more stable than a retirement fund that’s dependent on Wall Street. But the state’s pension system has been cash-starved for decades, and it requires a huge influx of funds to make up for past deficiencies. That money, union officials say, would be paid disproportionately by higher education institutions under the current system.
The State Employees Bargaining Agent Coalition, or SEBAC, negotiated an option for its members to switch to a hybrid retirement program similiar to the state’s pension fund in 2011 when it also granted the state numerous concessions, including a two-year wage freeze, an employee wellness health program and various restrictions on retirement benefits.
But while the Malloy administration said Tuesday that it will work with all agencies, including higher education, to manage their “budget obligations,” it didn’t address whether it would support changing the current funding structure.
“The ability of higher ed employees to change to the [State Employees Pension System] pension plan is economically advantageous to the state and to our employees,” said Karen Buffkin, Malloy’s deputy budget director, wrote Tuesday in a statement.
But Jim Howarth, the interim budget chief of the regents system, said, “I am looking at it as a major cost to us. To me, a person that switches costs us much more money.”
Pension system has a troubled past
The state’s pension system, has a troubled fiscal past, and the current controversy centers on how to pay for it.
As of its last valuation, the pension fund had $9.74 billion in assets — just enough to cover 42 percent of its long-term obligations. That’s an all-time low for the fund, which has been plagued by decades of insufficient savings.
Analysts typically cite a ratio between 70 percent and 80 percent as fiscally healthy.
That means that each year the state not only must pay into the pension fund to cover current workers’ future benefits, but it also must catch up on contributions it failed to make in years past.
This year’s total pension contribution equals nearly 55 percent of participating workers’ salaries.
The Alternate Retirement Plan — the 401k-type program — doesn’t have a troubled fiscal past. As a result, the state’s required contribution this year represents just 11 percent of workers’ salaries.
Example: For a university employee earning $50,000 annually, the difference is the university system’s paying a $5,500 annual contribution vs. a $27,500-a-year contribution to the state.
So as more higher education workers leave the 401k-type plan and join the pension “hybrid” plan that has identical benefits to other tiers in the pension system, what’s the cost?
SEBAC insisted in a letter to higher education employees last week that the hybrid plan should have been fiscally insulated from the pension system.
Livingston estimated colleges and universities would have had to contribute 5 percent of participating workers’ salaries to cover the actual costs of the hybrid pension plan, which — being new — also lacks the fiscal baggage of the pension system.
But the state incorporated the hybrid into the pension system.
So for every worker who left the alternate plan to join the hybrid, universities and colleges saw their shares of the pension contribution swell.
The Board of Regents for Higher Education system, where 335 employees at the state universities or community colleges have switched to a hybrid pension plan, is projecting a $13 million increase this year in total contributions owed to all types of retirement plans.
The UConn Health Center in Farmington, where 254 have switched, is looking at a $26.5 million increase.
UConn’s main campus in Storrs and its regional campuses, where a total of 301 employees have joined the hybrid plan, face a $25.6 million increase.
Those increases also are due to several factors, not just the added cost of the new hybrid system. State government is in the second year of a new effort launched by Malloy to catch up on deferred contributions to the pension fund. Also, most unionized state employees are getting raises this year after a two-year freeze as spelled out in the concessions deal. As salaries rise, so do required contributions to retirement plans.
Livingston said there is no doubt that this switch is costing the universities millions of dollars — or that it is allowing the state to reap the savings.
Roughly 20 percent of that state’s annual pension contribution comes from the federal government — which funds certain health care, defense and research jobs — and from public colleges and universities.
Whatever is left over, usually about 80 percent, comes directly from the state’s annual operating budget.
So every extra dollar that higher education pays that is one less dollar state lawmakers have to find in the state budget.
The plan “was not created, and must not be allowed, to create a windfall for the [state’s] General Fund at the expense of our Higher Education institutions,” said the SEBAC letter sent last week to its union members.
While 862 people have moved to the hybrid plan so far, about 3,500 employees still are eligible to switch.
If everyone eligible at the regents’ system alone — 17 institutions — were to switch to this new pension plan, it would cost the system $78.8 million a year, said Howarth, the regents’ system’s interim budget chief.
But Livingston argued the arrangement is unfair. That’s because workers who leave their 401k plan to get a pension already pay a fee to do so to get credit for the years they weren’t paying into the fund.
“Employees who move … pay the full actuarial cost of moving with respect to their past service — every penny,” reads the union memo.
For example, a 50-year-old employee with 20 years of state service earning $50,000 in his best year would have to pay $100,000 to switch to the pension.
The actual cost to the state, which administers the pension, for someone in this new plan is 5.2 percent of the employee’s salary, excluding the unfunded liabilities, Livingston said. The actual cost to the state for someone on the 401k plan is 8 percent.
“It is actually less expensive when people switch,” Livingston said.
What does this mean for students?
The state’s public universities have three main revnenue sources; federal funding, state funding and student tuition and fees.
Since most federal funding is itemized for specific purposes, that leaves the state or tuition and fees left to pick up this cost under the current funding structure.
“It’s a real problem. The regents will have less money to hire new faculty or will have to make cuts,” professor James Russell, who teaches at Eastern Connecticut State University and researches retirement policy, said during an interview.
The problem is on the radar of both the Senate chairwoman and Ranking Republican on the legislature’s Higher Education Committee.
“We absolutely need a solution. The question is can we get there?” said state Sen. Beth Bye, D-West Hartford, the Higher Education co-chairwoman. “It can’t just be tough luck, here’s what we decided.”
Solutions being considered include not requiring the state universities to pay the unfunded liabilities for those who transfer to the pension; the state would pick up the tab; or, continue with the current funding set-up.
Livingston said while the SEBAC agreement doesn’t clearly outline which reimbursement rate the universities would have to pay, the spirit of the agreement was not to force this huge cost on them.
“The current situation is unfair,” he said, pointing out that the way the situation has been presented by budget officials to the regents has left the impression that the problem is because employees are getting a more lucrative retirement plan vs. it being a problem in how the state is billing them.
Sen. Toni Boucher, R-Wilton, the ranking Republican on the Higher Education Committee, said it would be “illogical” not to include the unfunded liabilities for those who switch to the pension plan. When new employees join the pension plan, colleges are expected to pay the unfunded liabilities, so why not have the same rules for those who switch. However, she said, since it was Malloy who negotiated the contract with the union, the bill should not be left for the universities to pick up.
“They did not negotiate that contract. Let’s go back to how this problem occurred. They weren’t at the table when this deal was made. The responsibility lies with the executive,” said Boucher, who is exploring a run for governor in 2014.
“At the end of the day students and parents are going to end up paying,” she said.
Livingston said he is confident the problem will be resolved.
“Everybody is working on it,” he said.
[iframe src=”https://s3.amazonaws.com/s3.documentcloud.org/documents/808732/sebac-memo-on-hybrid-costing.pdf” frameborder=”1″ height=”800″ scrolling=”yes” width=”630″]
[iframe src=”https://s3.amazonaws.com/s3.documentcloud.org/documents/808747/sebac-malloy-agreement-from-2011.pdf” frameborder=”1″ height=”800″ scrolling=”yes” width=”630″]