Malloy will have a plan to smooth spiking teacher pension costs

Gov. Dannel P. Malloy’s administration is developing a proposal to restructure a second spiking pension expense threatening state finances, according to his deputy budget director.

But administration officials did not say whether the plan to manage surging costs tied to the teachers’ pension would be released Feb. 7 — when the governor’s final budget proposal is due — or later in the 2018 General Assembly session, which runs through May 9.

“Our fiscal future is challenging for us, just as it has been for the last few years,” Susan Weisselberg, deputy secretary of the Office of Policy and Management, said Tuesday during Connecticut Voices for Children’s annual state budget forum at the Capitol.

Arguably the single-largest challenge facing state finances involves projected surges in public-sector retirement benefits tied to pension and health care programs that have been improperly funded for decades.

Weisselberg said the administration has looked for other areas to curb spending, noting that executive branch staffing is 12.6 percent less than when Malloy took office in January 2011.

But despite that, union concessions deals, and reductions in municipal aid, social service programs and many other government functions, the challenge of stabilizing state finances over the long haul is far from over.

“We’re not going to have all of the answers in this instant.,” she said. “We can cut spending, but there is a certain point when the bleeding is painful and you need to look at other ways to get us on the path of fiscal stability.”

Malloy, state employee unions and the legislature agreed 12 months ago to restructure payments into the state employee pension fund.

A 2015 study by the Center for Retirement Research at Boston College had warned that annual contributions to the fund could skyrocket from about $1.6 billion to $6.6 billion between 2017 and 2032.

Similarly, it warned a $1 billion-per-year required contribution to the teachers’ pension could top $6.2 billion over the same period.

The restructuring for the state employees’ plan tried to keep the state’s annual contribution from rising beyond $2.4 billion.

But that shift came with a cost.

When the state contributes less, that limits the treasurer’s ability to invest pension resources and grow the fund.

The deferred contributions and lost investment opportunities involving the state employees pension would shift a projected $14 billion to $21 billion in extra costs to taxpayers between 2032 and 2046.

Connecticut doesn’t have the same legal flexibility, though, to restructure payments into the teachers pension fund.

That’s because the state borrowed $2 billion in 2008 to shore up the teachers’ pension and pledged to its bond investors not to short-change pension contributions for the life of the 25-year bond issuance.

In other words, if the state wants to pay less into the teachers’ pension than fund actuaries recommend — with a very limited exception — it needs to pay off the bonds first.

The state’s bond counsel, Day Pitney of Hartford, spelled this out in an opinion provided in late April 2016. And state Treasurer Denise L. Nappier has said she agrees.

But in the new state budget adopted last October, the legislature directed the  state Teachers’ Retirement Board and the Office of Policy and Management to study restructuring possibilities for the teachers’ pension.

Weisselberg did not provide details Tuesday but said, “OPM did hire an actuary and we will have recommendations on how to do that smoothing in a way that meets the concerns because of the issuance of pension obligation bonds.”

“Weisselberg added that “it is important that we avoid a cliff in future years” in teacher pension costs as the state also prioritizes funding for such key areas as transportation and eduction — particularly for its impoverished school districts. “That path of (budgetary) predictability is important not only for residents but for our businesses,’ she said.