Former hedge fund manager David Stemerman is trying to distinguish himself in the crowded field of Republican candidates for governor with a radical political and legal strategy for attacking Connecticut’s massive unfunded pension liability.
In the first of what he promises is a series of policy initiatives, Stemerman proposes to emulate General Motors, International Paper and other corporate giants by ending pensions — through negotiation, if possible, or going to court to break contracts, if necessary.
Stemerman, 49, of Greenwich is self-funding a campaign that is assembling a staff of national GOP strategists led by Mike DuHaime, the architect of New Jersey Gov. Chris Christie’s two victories and a former adviser to the Republican Governors Association. Stemerman is a first-time candidate following a path blazed in Michigan by another political newbie, Gov. Rick Snyder, a wonky investor and tech entrepreneur who proclaimed himself “one tough nerd.”
Connecticut, he told CT Mirror in a two-hour interview, is ripe for an “outside-the-box thinker” willing to confront long-term liabilities of between $80 billion and $100 billion that he says are the consequences of an unwillingness by a series of governors and legislators of both parties to confront a looming crisis.
Stemerman is not the first GOP candidate to suggest that the current levels of retirement benefits are unsustainable, but he takes the additional steps of insisting he is willing to test the limits of the state’s abilities to free itself of obligations negotiated over decades.
Without saying how much it would cost, Stemerman is proposing to use a mix of inducements, primarily lump-sum payments, and threats to convince retirees and employees vested in a pension plan to give up their pensions. He likened his task to that of a doctor who needs to convince a patient of the need for surgery that is radical or even experimental.
“What I’m saying to you is unless we do radical surgery, you will die,” Stemerman said. “And what I’m proposing is surgery that is aggressive, that in some cases would be novel, but I believe will save the patient’s life and will give the opportunity for the patient to thrive in the future.”
Unlike cities, states cannot avail themselves of bankruptcy courts to break contracts and force employees, and even retirees, to accept cuts in benefits. But he said state employees and retirees must accept that their promised benefits are unaffordable.
“There is not enough money today, nor will there be in the future, to meet all of the benefits that have been promised,” Stemerman said. “Reforming the pension system is inadequate. It will need to be restructured.”
Stemerman is convinced the state could take some steps unilaterally.
Teacher pensions are defined solely in statute and could be modified quickly. Some states have challenged cost-of-living adjustments for vested pension recipients, though Connecticut — unlike most other states — guarantees retirement benefits to state workers through contract, and not just in law.
But the biggest potential savings probably couldn’t be achieved without venturing into largely uncharted legal waters.
And Stemerman says it’s time for Connecticut to make the legal argument some have argued for years are an inevitability for badly indebted states.
Though unionized state employees have a benefits contract that runs through mid-2027, could the legislature and governor repeal collective bargaining, alter those benefits now and win the inevitable challenge in something akin to federal bankruptcy court?
Stemerman points to the principle in U.S. law which holds that the federal government, as well as those of the states, generally enjoy immunity from lawsuits.
“I would prefer not to go into a lot of detail on the legal or negotiating strategy, in that I think that is unhelpful coming into a negotiation,” he said. “But the law in this area is likely to be tested over the next several years.”
And while Connecticut’s per-capita pension debt far exceeds that of most other states, Stemerman insists the state won’t be the last to test whether pension benefits can be renegotiated. At best, he said, only 16 states have adequately funded pensions.
“The challenge we face in this state with the magnitude of the unfunded liabilities puts us high on the list for needing to confront these challenges,” he said. “But we are at the leading edge of a crisis that will be experienced nationally.”
Daniel Livingston, the lawyer who acts as chief negotiator for the State Employees Bargaining Agent Coalition, said Stemerman’s blueprint fails on legal, moral and economic grounds. “There are so many things wrong with that premise I don’t know where to start,” he said.
The contract clause within the U.S. Constitution long has been seen as a bulwark on any government intrusion into contractually guaranteed state pension rights, he said. That clause specifically bars states from entering into any agreement to impair the obligation of contracts.
More importantly, Livingston said, it is unfair to hold the unfunded liability against Connecticut’s workers when it stemmed from the failure of legislatures and governors to properly save for these contractual pledges.
Nearly 85 percent of this fiscal year’s’ required contributions to pensions for retired state employees and teachers involve redressing the sins of the fiscal past, not the amount needed to cover pledges to present-day workers.
Livingston added that to target benefits for existing retirees “who did nothing but work a career in which part of their promised compensation was a decent pension is fundamentally immoral and, on its face, a violation of the state and federal constitutions.”
A 2015 analysis of Connecticut’s pensions prepared by the Center for Retirement Research at Boston College, which warned of spiking pension contribution costs, also found retirement benefits for present-day state employees and teachers are comparable to those offered in most other states.
Stemerman notes these benefits still exceed those offered in the private sector. Livingston counters that the state already is having trouble recruiting public-sector employees because of the benefit changes and Stemerman’s plan only would worsen this problem.
“Now, if you even sought to break these promises, you would do even more damage to one of the state’s best assets, its workforce,” Livingston said. “And if we have a politician who begins by saying the state shouldn’t keep its binding promises, why would anyone believe he would keep his non-binding promises? That’s sort of stunning to me.”
But Stemerman asserts his plan would appeal to some workers, particularly those who agree the pension system — unless altered — will collapse before they can retire and reap its benefits. To encourage cooperation, he would bolster cash-starved retirement programs by dedicating state assets to these programs.
The state Commission on Fiscal Stability and Economic Growth recently made a similar recommendation, suggesting dedicating proceeds from the Connecticut Lottery, as well as the sale of state land and buildings, to pension costs.
Better management and a more vibrant economy could bolster the value of all of these assets, Stemerman says.
“I am looking not just to deliver bad news,” he said. I am there to deliver creative solutions to get everyone to a better place going forward.”