State Treasurer Denise L. Nappier warned this week that Gov. Dannel P. Malloy’s recommendation that Connecticut defer and restructure contributions into the teachers’ pension fund could jeopardize the state’s standing on Wall Street.
In a statement to the Teachers’ Retirement Board, which administers pension benefits to retirees, Nappier also said that, while pension costs will surge in the coming years, she doesn’t believe the spike will be as severe as projected in one study commissioned by the administration.
“The governor seems intent on making changes that risk the state’s credit, when what we really need is the discipline to stay on the current path,” Nappier said during Wednesday’s retirement board meeting.
The pension fund, which has enough assets to cover 56 percent of its long-term obligations, suffers from inadequate state contributions for much of the seven decades stretching from 1939 through 2008.
Pledges were made to state bond investors
But 10 years ago Connecticut borrowed $2 billion — by issuing bonds on Wall Street — to shore up the fund. That action, recommended by Nappier and approved by the legislature and then-Gov. M. Jodi Rell, also included a pledge from the state in its bond covenant — its contract with investors.
Connecticut specifically pledged, with one small exception under extreme circumstances, to deposit the full annual contribution recommended by fund analysts for the 25-year life of the bond issuance — or until that debt is paid off.
“I’ve always taken solace from the existence of the covenant that ran with those bonds, and that ensured that the state would stand by its commitment to pay the actuarially required contribution — year in and year out — for as long as the bonds remained outstanding,” Nappier told the retirement board. “I believe that were it not for that covenant, there very well may have been temptation for the state to backslide on its commitment.”
Pension costs will spike sharply
In a November 2015 report commissioned by the Malloy administration, the nationally recognized Center for Retirement Research at Boston College warned that the required annual contributions to the teachers’ and state employees’ pension funds would spike severely by 2032 — chiefly because of inadequate funding between 1939 and 2008.
The contribution to the teachers’ pension stood at $1 billion in 2016-17 and shot up to $1.29 billion this fiscal year. Boston College warned it could peak at $6.2 billion by 2032 — after which it would drop dramatically to around $300 million per year.
Malloy, unions and the legislature agreed last year to restructure payments into the state employees’ pension. Connecticut will contribute less than originally projected between now and 2032, but will have to make up those deferred payments — plus an estimate of the missed investment opportunities — after that point.
Administration projections showed $14 billion to $21 billion in costs would be shifted until after 2032, and the state wouldn’t catch up on all deferred payments until 2047.
Could the same thing be done with the teachers’ pension fund contributions?
The state’s bond counsel, Day Pitney of Hartford, said in an April 2016 opinion the contractual pledge made to bond investors in 2008 prohibits that option.
Malloy, unions favor restructuring now
The governor said Monday when he proposed his budget adjustments for the upcoming fiscal year that “we don’t believe there is a conflict” with the bond covenant.
And even though others argue there is, Malloy added, he doesn’t believe the state’s bond investors would object, because restructuring pension payments would make state finances more stable and predictable.
“I doubt an individual would have an objection to that,” the governor said.
The state’s teachers’ unions endorsed Malloy’s efforts this week.
Jan Hochadel, president of state chapter of the American Federation of Teachers, said Thursday that Nappier “has raised important concerns” but the union still supports the governor’s plan in concept.
“We appreciate her steady stewardship of the retirement security that tens of thousands of current and former Connecticut educators depend on,” Hochadel said. “A solution for decades of politicians failing to prioritize this valuable public asset is an objective we all share — one we’re ready to achieve by working together with all stakeholders.”
“We understand the need for caution regarding Governor Malloy’s proposal to re-amortize the teacher retirement fund and we agree that there must be a requirement that the state contribute its fair share,” Connecticut Education Association President Sheila Cohen said. “We also know, however, that the state must take action to protect and ensure the long-term solvency and stability of the fund. CEA supports an actuarially sound plan that keeps the fund viable.”
Nappier said she also wants to protect teachers’ pensions, but there is a better way to do it.
CT’s standing on Wall Street has slipped
“The governor’s proposal to restructure payments into the Teachers’ Retirement Fund represents a clear breach of that covenant, and I can’t stand idly by and simply watch it happen,” she said. “I can appreciate that the governor is trying to come up with a solution to projected growth in future state payments into the fund. But the plan he proposes will result in a technical default on the pension obligation bonds.”
Connecticut’s standing on Wall Street already has taken a few hits in recent years.
Between November 2016 and May 2017, each of the four major Wall Street credit rating agencies — Moody’s Investors Service, Fitch Ratings Service, S&P Global Ratings, and Kroll Bond Rating Agency — downgraded their rating for Connecticut general obligation bonds at least once.
The legislature last year approved a special “tax-secured bonding program” to bolster the state’s credit image.
The sale of general obligation bonds to investors is one of the principal means state government uses to finance municipal school construction, building programs at public colleges and universities, maintenance of state facilities and other capital projects. The bonds are termed “general obligation” because the state pledges to repay them using resources from the General Fund within the state budget.
Under the new program, instead of using general obligation bonds, Connecticut chiefly will issue “new credit bonds.” The state would have to commit a specific portion of its income-tax stream to repay its bonds. It also would generally repay these bonds over a slightly longer period of time, typically adding about one year to the process.
Nappier said after a year or two of this more secure approach, the state might be ready to transition back to relying on more traditional bonding.
Nappier: CT could fix teachers pension in 2025
While the treasurer agrees that decades’ worth of inadequate funding have taken a toll on pensions, she disagreed with some of the Boston College center’s methodology.
When the 2015 study was done, Connecticut was assuming aggressive average rates of return on pension investments, about 8 percent over 30 years. The state employees’ fund now assumes 6.9 percent.
The Boston College study tried to determine what would happen to pension programs in future years if investment returns averaged 5.5 percent.
But the treasurer said the center underestimated — even if investment returns do average 5.5 percent — how much the state would mitigate that problem with higher payments every two years well before 2032.
And if contributions do surge too high, Nappier said, there is another fix besides challenging the bond covenant pledge.
In about seven years, the remaining debt on the 2008 bond issuance could be paid off if the state has the resources to do so. That’s when all of the outstanding bonds could be called.
Then, with the bond covenant language off the table, future payments could be restructured.