While state government continues to explore spreading its pension debt further into the future, Connecticut apparently won’t have that option when it comes to benefits owed its public school teachers.
The state’s bond counsel warned that restructuring contributions to the teachers’ pension would violate restrictions the state accepted when it borrowed $2 billion to bolster the fund eight years ago.
And state Treasurer Denise L. Nappier, who oversees investments of pension funds, said last week that her office agrees with the opinion set out recently by the Hartford law office of Day Pitney.
“The recent opinion of bond counsel affirmed what was always intended when bonds were issued to reduce a portion of the teachers’ unfunded liability: that the State would have to fully contribute what the actuaries say is required, and that deviating from this plan could only happen under very limited, extraordinary circumstances,” Nappier said.
The state’s retirement benefit programs — among the most poorly funded in the nation after seven decades of inadequate savings — now are projected to drive major annual cost increases in the state budget through the mid-2030s.
Connecticut began offering state employees and public school teachers pensions back in 1939. For decades it saved nothing to cover either benefit, and did not set aside the full amount recommended by fund analysts until 1979 for teachers and until 2012 for state employees.
The state employees pension holds enough assets to cover 42 percent of its long-term obligations — roughly half of the 80 percent ratio analysts typically cite as healthy.
The teachers’ fund is 59 percent funded and would be much worse off had Connecticut not borrowed $2 billion in 2008 — to be financed over 25 years — to bolster its resources.
Each year the state budget must contribute enough to the pension programs both to catch up on past mistakes and to cover the future retirement costs of today’s state employees and teachers.
Connecticut will dedicate 12 percent of its General Fund in the upcoming fiscal year, more than $2.1 billion, to contributions to both pension programs combined.
Some projections hold that cost could more than quadruple over the next 20 years.
Both Gov. Dannel P. Malloy and state Comptroller Kevin P. Lembo have proposed restructuring the state employee pension system. State contributions still would grow, though not as severely, and would remain at high levels into at least the mid-2040s.
The Center for Retirement Research at Boston College, hired by the Malloy administration last fall to study pension issues, reported last November Connecticut could restructure its teachers’ pension system in a similar fashion and obtain more short-term budget relief.
But according to attorneys with Day Pitney, that would violate a legal pledge Connecticut made to its investors eight years ago. Specifically the state wrote into its bond covenant that it would contribute the full amount recommended by teachers’ pension fund analysts for the life of the bond issuance.
Nappier said last week this pledge “was carefully and deliberately drafted.
“It was and remains essential that the state reverse the trend of shorting its payments, and that the teachers’ fund make progress toward near or full funding within a fixed period of time. Bond counsel made clear that changing the amortization schedule would violate the bond covenant.”
Clare Barnett, chairwoman of the state Teachers Retirement Board, could not be reached for comment Friday.
Tom Singleton, president of the Connecticut Association of Retired Teachers, said Friday that his organization had not analyzed the center’s suggestion about restructuring contributions to the pension.
The association and its affiliates, which represent about 16,000 retired Connecticut teachers, has focused on insisting that the state maintain its pension program for teachers, rather than trying to replace it, as some legislators have suggested, with a 401(k)-style, defined-contribution retirement plan. “We are pleased they (state officials) have not moved in that direction,” Singleton said.
The Teachers Retirement Board voted last winter to reduce the assumed return on investments of teacher pension funds from 8.5 to 8 percent. Many states have been reducing assumptions about pension investment earnings in recent years, arguing levels close to 8 percent no longer are realistic.
This reduction ultimately means the state must contribute even more to the pension system in future years to compensate for lesser investment earnings.
Chris McClure, a spokesman for the governor’s office, said the legal warnings from bond counsel and from the treasurer’s office only highlight the need to take other measures to better manage surging pension costs.
“We know the state faces a massive pension challenge, and we know we simply cannot afford to wait any longer to reform TRS (Teachers’ Retirement System) and SERS (State Employees Retirement System,)” McClure said. “That’s why we are working on a comprehensive plan to tackle it. The Teachers Retirement Board has already taken the responsible action of reducing the assumed rate of return to 8 percent to more accurately reflect reasonable market returns and they will continue to work toward reasonable, affordable, and creative solutions to prevent additional growth in and to pay off the unfunded liability in TRS.”