While offering tempered praise this week for a plan to stretch out Connecticut’s spiking pension costs, state Treasurer Denise L. Nappier also said legislators must cast at least one vote related to the deal.
That recommendation could put the treasurer at odds with her fellow Democrats in the House and Senate, whose leadership has been noncommittal about forcing members to go on the record on a plan to shift billions of dollars in pension costs onto future taxpayers.
Nappier, who released her analysis of the deal Wednesday, also expressed concerns about a provision that allows the state to spread investment losses and other funding problems 25 years into the future.
And the treasurer also urged Gov. Dannel P. Malloy’s administration to work with credit rating agencies to ensure Wall Street doesn’t look unfavorably on the deal.
“The General Assembly must legislate its commitment to make the annually required contribution so that future generations of public officials and collective bargaining units cannot repeat the ill-advised funding practices that got us to the place we are today,” Nappier wrote.
The treasurer did not weigh in on whether the legislature should ratify the deal with affirmative votes in the House or Senate, or take advantage of existing rules that allow for approval without a vote after a 30-day waiting period.
But that doesn’t matter.
If the deal is ratified, she said, it needs to be accompanied by a new law pledging not to defer pension payments or contribute less than the annual amount recommended by fund analysts. And state laws only can be enacted through a vote of the General Assembly.
“We must insist upon what has been missing from prior approaches to these challenges – an ironclad commitment to funding of the state’s actuarially required annual pension contribution,” Nappier wrote.
A statute committing Connecticut to making its full annual pension contribution still could be repealed or amended by a future legislature. But then that body would be on record as having done so.
The top Republicans in the Senate and House, Len Fasano and Themis Klarides — who have criticized the pension restructuring deal — have said both chambers should cast ballots on the agreement.
But under existing rules, the legislature can adopt worker contract amendments and arbitration awards without voting to do so. Such contracts are deemed approved if, within 30 days of their filing with the House and Senate clerk, they have not been rejected by either chamber.
The clock would begin ticking on the new pension agreement on the opening day of the 2017 regular legislative session, which is Jan. 4, and — unless voted down — it would be ratified 30 days later.
Though Nappier didn’t address the ratification process in her statement, she wrote that the deal “represents a tangible step forward,” and that Malloy and state employee union leaders “are to be commended for developing a thoughtful and well-considered approach. While the broad outlines of the plan appear promising, I look forward to reviewing a comprehensive actuarial analysis concerning the precise impact of this restructuring so that we can fully appreciate its implications.”
Under the deal, the state still would pay hefty pension bills for the next 16 years, with annual costs rising from $1.6 billion to $2.2 billion over that period. But under the current system, costs were projected to reach as high as $6.6 billion by 2032.
In exchange for that relief, though, pension expenses that were supposed to drop as low as $300 million per year after 2032 would remain at or above $1.7 billion in the 2030s and at least through 2046.
The treasurer praised several components of the deal, including a commitment to pay off a significant portion of the long-term liability before 2032 and a “more realistic investment return assumption” of 6.9 percent.
The fund currently assumes an average annual return on investments of 8 percent. Since the last recession ended, critics in financial services and academic circles have recommended much smaller targets, generally between 3 and 5.5 percent, pointing to the yield on long-term U.S. Treasury bonds.
“Having said that, there are elements of the agreement that give me pause and that deserve more scrutiny,” Nappier continued.
The treasurer focused on a provision that the state spread pension fund losses or gains — tied to investment results or to changes int the plan — deep into the future.
For example, investment losses must be offset by higher contributions made before 2032. The new arrangement allows the state to spread this burden out for 25 years after the year when any losses occur.
This would make pension costs less volatile. But if Connecticut consistently struggles to make its investment targets, annual costs could rise beyond targeted levels.
“While I support reasonable phase-ins of gains and losses to temper the impact on the state’s yearly pension costs, the use of 25-year phase-ins should be very limited,” Nappier wrote.
The treasurer also said that the impact of some plan changes should not be deferred at all.
For example, five times between 1989 and 2009, the state paid senior workers incentives to retire early — a move which eased pressure on the budget but drained extra resources from the pension fund.
If the legislature and governor were to take such action again at some point, the resulting losses to the pension fund should not be spread out over the long term, Nappier said.
Lastly, the treasurer urged the administration to ensure the deal does not threaten Connecticut’s standing with Wall Street credit rating agencies.
A rating downgrade could make it more costly for Connecticut to borrow funds in future years for capital projects such as school and road construction.
“For the sake of protecting the state’s credit, we should commence constructive dialogues with rating agencies so that the ultimate reform is judged no less than credit neutral,” she wrote.
Moody’s Investors Service issued a statement Thursday calling the restructuring a “credit positive” for Connecticut.
“We agree with the Treasurer – there is more work to be done, but this agreement represents a real, tangible step forward,” Chris McClure, spokesman for the governor’s budget office, said Thursday. “We must ensure future governors and General Assemblies share our commitment to fully funding the ARC, which should be more manageable with stable and predictable payment amounts; the credit rating agencies must be clear and informed on this proposal; and that retirement incentive programs … should be forever relegated to the wastebasket of bad ideas in the state in Connecticut, thus should not change the valuations of our pension system.”