Office of Policy and Management Secretary Ben Barnes Keith M. Phaneuf /
Office of Policy and Management Secretary Ben Barnes Keith M. Phaneuf /

Gov. Dannel P. Malloy’s push to smooth out spiking state contributions to the teachers’ pension may hinge on a new proposal to dedicate lottery assets to the cash-starved retirement benefit fund.

Malloy’s budget chief, Office of Policy and Management Secretary Ben Barnes, told legislators Friday that a transfer of lottery revenues might hold the key to resolving complex legal rules governing pension contributions.

One of the fastest-growing segments in the nearly $20 billion annual state budget, the $1.3 billion payment Connecticut will make this year into the teachers’ pension fund is projected to skyrocket over the next 10 to 15 years because of seven decades of inadequate funding before 2009.

That yearly contribution, according to a 2015 report commissioned by the governor, could peak at more than $6.2 billion. And while a peak that severe is disputed by state Treasurer Denise L. Nappier, she agrees that the contribution probably could surge to a level too high for the state budget to bear.

Dedicating additional, new revenues to that fund — and extending the period of time during which Connecticut pays for the fiscal sins of the past — could be a solution.

“This combination of actions could result in a significant reduction in risk in out-year, catastrophic payments,” Barnes told the legislature’s Finance, Revenue and Bonding Committee. He added that, while the state still would face steep pension payments for many years to come because of the decades of fiscal neglect, they could be “much more easily affordable” than they are likely to be under the current schedule.

The pension fund, has enough assets to cover 56 percent of its long-term obligations.

That ratio would be much worse, but 10 years ago Connecticut borrowed $2 billion — by issuing bonds on Wall Street — to shore up the fund. The funds were borrowed over 25 years and are scheduled to be paid off by 2033.

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.

The state employees’ pension fund suffers from fiscal neglect similar to that of the teachers’ pension. The governor, unions and the legislature agreed last year to restructure payments into the 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.

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 type of restructuring of the teachers’ pension.

But a new state study panel, the Commission on Fiscal Stability and Economic Growth, recently recommended that legislators consider dedicating an asset, such as the annual proceeds it receives from the quasi-public Connecticut Lottery Corporation, to a pension fund.

The lottery sent between $330 million and $338 million into the budget’s General Fund in each of the past two fiscal years. Barnes acknowledged that dedicating the lottery revenues to the pension fund would force the state to find savings elsewhere.

And Barnes said that if this stream were pledged to the teachers’ pension for a decade — and if reasonable growth is assumed from the investment of those revenues — it could be worth $4.5 billion to $5.5 billion to the pension fund over this period.

This would raise the teachers’ pensions’ funded ratio beyond 70 percent. In other words, it would — with the lottery revenue stream — have enough assets to cover more than 70 percent of its long-term operations.

The bond covenant does allow the legislature and governor to modify pension contributions modestly, provided the funded ratio is in excess of 70 percent.

Barnes also said the lottery assets might help position the state to pay off the pension bonds early, possibly in the mid-2020s, thereby removing the bond covenant as an impediment to restructuring pension payments.

The Teachers’ Retirement System Viability Commission, a study panel created by the legislature, must report by March 31 on options to restructure teacher pension payments. The panel includes representatives from Barnes’s office, the state’s Teachers Retirement Board, and the state’s pension actuaries.

Barnes called the lottery funding “an extremely reliable asset,” and while he declined to predict what the viability commission would recommend, he added that the lottery transfer probably would get careful consideration.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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