Auditors again find costly problems with state pension program
For the second time in five months, state auditors have disclosed a host of problems with the state’s retirement benefits programs.
And while much of Tuesday’s report focused on millions of dollars in “preventable” interest costs tied to a growing backlog in processing pension cases, Auditors John C. Geragosian and Robert M. Ward also repeated earlier concerns and raised new ones about the state’s controversial disability pension program.
Comptroller Kevin P. Lembo has said on several occasions that the issues raised by the auditors pre-date his administration, which began in January 2011. But the auditors wrote that many of the issues they are citing remain points of contention now.
The audit covers 2009 through 2011. Lt. Gov. Nancy Wyman was state comptroller from 1995 through 2010.
“The division consistently pays retirees estimated benefits that are less than the benefits calculated during the pre-audit process, resulting in higher retroactive payments and thus higher interest payments owed at the time of finalization,” the auditors wrote.
The auditors’ office has complained for many years about a growing backlog in the process of finalizing pensions for retired state workers.
Once an employee leaves state service, an interim pension payment is estimated. The retirement services division then begins an audit process to calculate the pension precisely to reflect salary history, overtime, hazardous duties and other factors.
This process always has been done manually and involves assembling paper, microfiche and electronic records – some of which go back decades – for each retiree.
But things became particularly problematic in the 2000s when legislatures and governors approved three early retirement incentive programs that produced big surges in workers leaving state employment earlier than anticipated.
According to past reports from the state auditors, the backlog grew from 1,200 just before 2003 to almost 6,600 by 2008. It had reached 10,600 by mid-2010 and 11,880 by May 2014.
Lembo’s office reported the backlog at 14,380 cases last August when it unveiled a plan to convert to a new, computerized pension audit module. Martha Carlson, Lembo’s chief of staff, told the retirement commission that the goal is to eliminate the entire backlog by March 2016.
Retirement backlog carries a significant cost
Still, the backlog remains a concern for the auditors because of the cost to the state. State law requires Connecticut to pay 5 percent interest per year on any lump sum amount deemed owed to the retirees after the audit is completed.
That problem is compounded by the backlog, the auditors wrote, since the average time to finalize a state pension is six years and four months.
Lembo has noted there hasn’t been much pressure from labor or state management to change the system.
“The retirement fund is incurring unnecessary interest expenses due to the intentional underpayments of estimated benefits,” the auditors wrote Tuesday. “While these amounts are not substantial, they are preventable.”
The auditors reviewed a sample of 40 pension cases and found that the state ultimately had to make $416,000 in retroactive payments in total, plus another $41,000 in interest costs.
Between 2009 and 2011, the years covered in the audit, the state paid out almost $2.1 million in interest.
The auditors also found that “at least two different methods” were used to calculate interest and that “our recalculations do not support either of these methods.”
Both inflated overpayments, one by about 0.4 percent and another by 3 percent, Ward and Geragosian wrote. “Both methods do not appear to reflect the intent of … the Connecticut General Statutes, and include additional time in the interest calculation,” they added.
In a written response to the auditors, Lembo’s office wrote that, “The Retirement Services Division is in agreement with these changes. The current Retirement Service Division management team was not aware of this difference and will correct the situation as quickly as possible.”
The office added that development of the new pension audit module also should address concerns about excessive interest payments.
Disability pension controversy lingers
Ward and Geragosian renewed their concerns about the criteria the state uses to award disability pensions to workers.
The auditors first reported in June that a “breakdown” in the disability pension system going back many years may have cost the state millions of dollars in improper payments, and they recommended that legislators rewrite the pension statutes to clarify the matter.
According to state law, an employee is disabled for up to 24 months if unable to perform the duties for which he or she was hired because of job conditions. After that, the employee may continue on disability retirement only if certain other conditions are met. In particular, that employee must not be able to perform some other “suitable or comparable” state occupation.
Instead benefits were being issued as long as a disabled worker couldn’t return to his or her original job, according to the auditors.
Lembo said this practice pre-dated his administration and needed to be resolved through labor negotiations. The state employee unions and Gov. Dannel P. Malloy’s administration reached an agreement in August that the more lenient standard would be followed.
Tuesday’s report raised some new concerns as well.
The auditors sampled 26 disability benefit cases and found that in one-third, Medical Examining Board physicians didn’t even address whether recipients were healthy enough to return to work on the written assessment form.
“There is a considerable risk that individuals are receiving disability retirement benefits which they are not entitled to, resulting in improper costs to the State Employees Retirement Fund,” Ward and Geragosian wrote.
Lembo’s office responded that reporting procedures have since been revised to address this matter.
$154,000 spent on services never used
Other concerns cited by the auditors include:
- More than $154,000 that was spent in 2007 and 2008 to purchase document imaging services for the municipal employees retirement system that never were received. According to Lembo, his administration made several attempts to utilize the purchased services, but “we have encountered several technology limitations. We are continuing to work through the limitations and are still planning to move forward with the imaging of the documents over the next fiscal year.”
- The Retirement Services Division lacks current, formal, comprehensive written policies and procedures manuals. “The ability to properly train staff, and the effectiveness and efficiency of the functions within the Retirement Services Division may be diminished,” the auditors said. Lembo’s office did not dispute this finding and responded that it is developing “complete and comprehensive written policies and procedures.”
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