State Comptroller Kevin P. Lembo said Tuesday he is developing an alternative plan to restructure Connecticut’s payments into the cash-starved pension fund for state employees.
And though details of the Lembo concept were preliminary, the comptroller said his proposal, unlike the realignment plan Gov. Dannel P. Malloy offered last month, would not split the pension system into two components. Malloy recommended shifting the bulk of pension costs — involving benefits primarily for retirees whose state service had begun prior to 1984 — outside of the pension fund and directly into a state budget.
Lembo isn’t the only official developing an alternative to the governor’s proposal.
State Treasurer Denise L. Nappier, who has said Connecticut needs to consider “less radical” changes than the governor proposed, told the pension Investment Advisory Council last week that she would unveil her alternative at its December meeting.
“It is clear that our state faces unsustainable future pension payments under our current system,” Lembo wrote in a letter to the governor outlining the alternative plan. “I am in full agreement with your assessment of the problem and the need for action. As you have said, it is time for the state to reform our pension funding methodology in a way that will create more manageable and predictable payments in future years, while responsibly paying our past and present obligations.”
The Malloy administration estimates that this fiscal year’s $1.5 billion contribution to the employees’ pension — as it’s currently structured — will double by 2025 and more than quadruple by 2032.
Those estimates are based largely on two factors:
The pension fund currently has enough assets to cover less than 42 percent of its long-term obligations. Fund actuaries typically cite a ratio of 80 percent as a sign of sound fiscal health.
And while those calculations assume pension fund investments will earn, on average, 8 percent per year over the next three decades, the administration argues a return of about 5.5 percent is more likely. Officials note that’s what fund investments have earned over the past 15 years.
To avoid the coming fiscal iceberg, the governor wants to strip the bulk of pension fund costs — benefit payments owed to retirees who earned peak benefits in the mid-1980s and earlier — out of the system.
Those benefits still must be paid, and would be covered by a line item in the state budget.
But the state would set aside billions of dollars less than originally planned between now and 2032 to cover pension payments to existing workers.
Connecticut would make up those contributions, as well as the investment earnings they would have delivered, for at least a decade or two after that.
Full actuarial runs of the governor’s plan haven’t been released to date, but Nappier and others have expressed concerns that this would shift billions of dollars of pension costs into the future.
Lembo said he also would extend payments into the future and develop lower, more realistic assumptions about investment earnings.
More frequent, comprehensive audits of the pension system also are needed to periodically ensure that all assumptions behind the system are reasonable, he said.
“While we appreciate the feedback and agree that the state must take action, the governor and nationally-recognized experts at Boston College’s Center for Retirement Research have been studying this for nearly a year,” Gian-Carl Casa spokesman for the governor’s budget office, said Tuesday.” We put forward a vetted report with 67 pages of research, data, and details. The Comptroller has issued a press release that raises more questions than it answers.”
The comptroller also said there are other crucial questions that need answering before any changes to the pension system are considered.
For example, Connecticut’s grants under the federal Medicaid program reflect the cost of providing retirement benefits to state health care workers — involving both current employees as well as retirees.
Would Connecticut lose federal funding if existing retirees no longer are paid benefits out of the pension fund?
The comptroller also is concerned how Wall Street credit rating agencies will react to these changes. Would deferring pension contributions translate into lower bond ratings, and therefore higher interest charges when Connecticut wants to finance capital projects?
And both Lembo and Nappier have asked whether paying benefits to some retired workers out of the state budget — and not out of the pension fund — would require federal Internal Revenue Service approval. This question needs to be answered to ensure that the federal tax advantages afforded to state pension recipients are not affected.
Read Lembo’s letter to the governor here.