As she begins her final year as state treasurer, Denise L. Nappier fears Connecticut may be retreating from the gains it’s made over the last decade in responsibly tackling its huge retirement benefit liabilities.
Talking with reporters Wednesday after announcing she would not seek a sixth term, Nappier said a key pledge of fiscal discipline Connecticut made one decade ago is at risk.
“I’ve been concerned about the state reverting back to the habits of old and doing away with whatever they can to get out from underneath the covenant that obligates them to contribute 100 percent … each and every year,” Nappier said.
The “covenant” the treasurer cited was a contractual pledge Connecticut made to its investors in 2008 when the state borrowed $2 billion to shore up the cash-starved teachers’ pension fund.
The state pledged to contribute the full amount recommended each year by fund actuaries. But finding those funds in the annual budget has gotten increasingly difficult over the last decade. And the yearly contribution is projected to surge even more dramatically between now and the early 2030s as Connecticut makes up for past decades of inadequate savings.
“I’ve never been so concerned as I am since this last budget,” Nappier added, referring to the two-year state budget adopted with overwhelming bipartisan support in late October after an unprecedented nine-month stalemate.
One of the dozens of moves used to help avert massive projected deficits in both years was an increase in pension contributions from present-day teachers — and a corresponding drop in the state’s payments into the fund.
Nappier said when the budget was passed that this violates the “spirit” if not the letter of the 2008 bond covenant.
Legislators also empowered the state Teachers Retirement Board and other groups to study options to restructure future state contributions owed to the fund. The goal would be to scale back somewhat the dramatic increases projected between now and the early 2030s — but then to make up those payments plus some of the lost investment opportunities for a decade or two after that.
This would have a smoothing effect on the spiking annual contributions while also increasing the total amount the state would pay over the long haul.
Lawmakers are expected to receive an analysis of restructuring options during the 2018 General Assembly session, which begins in February.
But what about the bond covenant?
The Hartford law firm of Day Pitney, the state’s bond counsel, warned in a 2016 opinion that the state’s contribution largely is fixed for the 25-year life of the bond issuance, unless Connecticut finds a way to pay off the loan earlier.
“My fears were at my front doorstep when the legislature approved the last budget and found a loophole in the bond covenant — though I don’t see it as a loophole,” Nappier said.
And she added she remains concerned “that loophole is going to get bigger and bigger and bigger.”
The state’s required contribution to the teachers’ pension stood at about $1 billion last fiscal year and now is about $1.29 billion.
The Center for Retirement Research at Boston College estimated in a November 2014 study that this annual contribution could peak at $6.2 billion in the early 2030s if returns on pension investments are modest during the interim.
Nappier has questioned that forecast, but nonetheless agrees that the pension contributions are likely to grow dramatically over the next decade to 15 years.
Entering her 20th year as treasurer, Nappier said too many legislatures throughout her tenure may have been lulled by Connecticut’s considerable wealth — and by the belief that the pension bill was a problem for the future.
“We’ve always had one of the worst, unfunded ratios” for the pensions for teachers and for state employees, she said.
Warnings against inadequate annual contributions and paying incentives for workers to retire early were ignored, Nappier added.
“People would say, ‘Denise is a real nerd. Let’s move on. Next’,” she said, adding most legislators didn’t understand the severity of the problem until the last recession, when pension funds’ investments nationwide dropped sharply in value.
“This is not a new phenomenon,” she added. “You know what I said? ‘Welcome to my world.’”