Shifting pension costs from state to teachers costs CT $20M
Legislators decided this fall that teachers would contribute tens of millions of dollars more annually toward their pensions — and state payments would drop by matching amounts.
But according to state Treasurer Denise L. Nappier, that cost shift still came at a price to the state — and the bill is just over $20 million.
While that cost might seem small, given that Connecticut will pay it off over the better part of two decades, Nappier warned any increase in the state’s massive retirement benefit debt sends a dangerous message as Connecticut tries to reverse decades of neglect in this area.
“It is a slippery slope,” Nappier wrote in a recent memo on changes to the teachers’ pension fund. “Any increase in the unfunded liability, however small, is a step in the wrong direction.”
Connecticut has more than $70 billion in long-term, unfunded liabilities, including about $50 billion related to retirement benefits.
The treasurer also questioned how Wall Street would view the $20 million increase in teacher pension fund liabilities.
Connecticut borrowed $2 billion to shore up the cash-starved pension fund in 2008. And it promised in its contractual covenant with bond investors not to reduce state contributions into the fund over the 25-year life of that $2 billion loan.
Is it OK to reduce state contributions by almost $60 million over two years and replace them with a matching amount from teachers, even if it increases the pension debt by $20 million?
“The changes may meet the letter of the law regarding the bond covenant,” Nappier wrote, “… but they certainly violate the spirit.”
Citing the American Academy of Actuaries — the 19,000-member professional association that sets qualification and practice standards for pension fund analysts across the United States — Nappier added that “the movement or trend of the funded ratio is as important as the absolute level.”
In other words, even a small step backward is significant.
How did state officials take that step in the new, two-year state budget adopted in late October?
Trying to avert huge potential deficits this fiscal year and next, legislators ratified a major concessions deal that Gov. Dannel P. Malloy negotiated with state employee unions. That package, among other things, reduced retirement benefits and increased pension contributions for current state employees.
The new budget also requires public school teachers to increase contributions toward their pensions — from 6 to 7 percent of their salaries — starting Jan. 1.
Teachers are expected collectively to contribute $56 million to $59.5 million more across this fiscal year and next combined. And the new budget allows the state to reduce its payments by a matching amount.
But even though this represents a wash as far as the fund is concerned, Nappier says it isn’t that simple.
Though teachers’ respective salaries and years of service are the chief factors used to calculate the values of their pensions, employee contributions toward that benefit are a factor as well.
So if teachers contribute more, the state owes larger pensions.
And according to the state’s actuarial consultants for this fund, Cavanaugh Macdonald of Kennesaw, Ga., that’s why the state ends up owing an extra $20.4 million.
The state’s two major teacher unions, the Connecticut chapter of the American Federation of Teachers and the Connecticut Education Association, criticized the increased employee contributions, calling it a “tax” on teachers.
“From the beginning, our members made clear that a targeted tax on teachers was an unjust approach to balancing Connecticut’s finances,” said AFT Connecticut Vice President Stephen McKeever. “… We appreciate the state treasurer once again demonstrating due diligence and calling attention to the shortcomings of the compromise state budget’s final provision. Exposing the threat to the stability of this vital public asset should move lawmakers to right their wrong in the next legislative session.”
Republican legislative leaders — who originally wanted teacher contributions raised over two years to 8 percent — objected to the “tax” claim. GOP lawmakers countered that teachers were being asked to contribute more — as state employees are — but also would get their contributions back upon retirement.
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