While past governors legislatures and governors get much of the blame for Connecticut’s massive pension debt, a new analysis says politically appointed oversight boards should share the heat both here and in other states.
A recent analysis from The Manhattan Institute, a conservative, New York-based public policy group, also charged that labor representatives on these boards risk long-term pension stability to achieve short-term union objectives.
“Among the sources of the underfunding malaise are the boards that oversee the pension funds,” the report states. “ … Unfortunately, the incentives of board members lead them away from protecting employees and taxpayers from major financial risks.”
In 2016, states’ pension funds held — on average — enough assets to cover 69 percent of their long-term obligations.
In Connecticut, which underfunded its pension programs for more than seven decades between 1939 and 2010, the state employees retirement system’s funded ratio is 37 percent. The teachers’ pension is better,p at 56 percent, but it also benefitted from a $2 billion deposit the state borrowed — at about 5.8 percent over 25 years — in 2008.
The typical pension board has five to 15 trustees, usually a mix of appointees by governors and legislatures, and current and retired workers selected to represent labor.
In some states, these appointed pension boards decide how billions of dollars in pension assets are invested. In others, like Connecticut, the pension investments are controlled by the treasurer’s office.
But in many states, including Connecticut, these boards play a key role in helping to determine how much states must budget for pension contributions.
In Connecticut, the State Employees Retirement Commission and the Connecticut Teachers Retirement Board not only administer retirement benefits, they also set the discount rate — the assumed average rate of return on pension investments.
This is key because the higher the assumed rate — the more money the panels estimate pension fund investments will earn — the less money governors and legislatures must budget for pension fund contributions.
“Board decisions most in keeping with a plan’s fiscal health would make conservative investments and tend to keep the discount rate lower,” the analysis states. “But that is not what happens.”
Most of the nearly 300 state government pension systems and 6,000 local government-administered retirement systems set discount rates between 7 and 8 percent, according to the Manhattan Institute.
Critics in financial services and academic circles have argued that, since the last recession ended in 2009, a better target is closer to 4 percent, pointing to the yield on certain U.S. Treasury bonds.
Moody’s Investors Service proposed a new methodology in July 2012 that used the return of high-quality corporate bonds as its new guideline, noting that their average yield was 5.5 percent in 2010 and 2011.
And a “state stress-test analysis” released by The Pew Charitable Trusts earlier this year assumed states would average a 5 percent return on investments in the coming decades.
The Manhattan Institute analysis also asserts that unrealistic rates also leads some states to make excessively risky investments with pension funds, sometimes costing taxpayers more dollars in the long run.
Connecticut lowered its discount rates in recent years, but none approach these suggested levels. It lowered the rate for the state employees’ pension, in two stages, from 8.25 percent to 6.9 percent, and for the teachers’ fund from 8.5 percent to 8 percent.
Connecticut state Treasurer Denise L. Nappier told the legislature’s Appropriations Committee last March that a 7 percent rate assumption for the teachers’ pension “would be more reasonable and consistent with our capital market expectations going forward.”
The legislature’s Finance, Revenue and Bonding Committee raised a bill last spring that would have transferred authority to control pension investments from the treasurer to an appointed board.
Nappier testified against that measure — which died in committee — arguing the politically appointed panel would have authority over $60 billion in public assets, yet exempt from the requirement under the state Code of Ethics to file statements of financial interest.
State Rep. Fred Wilms, R-Norwalk, who serves on the new Pension Sustainability Commission, said Connecticut’s best course of action is “to move as many employees as quickly as possible into 401(k)-style defined-contribution plans” and out of pensions. “We need to get the state out of the actuarial risk business.”
But Sal Luciano, recently retired executive director of Council 4 of the American Federation of State, County and Municipal Employees, said the Manhattan Institute analysis is flawed on several grounds.
Luciano, who has served on the State Employees Retirement Commission since 2001, said labor and management trustees “are in agreement all of the time,” adding gridlock has been “extremely rare.”
And while state employee unions did consent to requests from multiple Connecticut governors to defer pension contributions in the 1980s, 1990s and 2000s, they did so with a figurative gun to their heads: Allow the state to short-change pension contributions or face major layoffs.
“There were times the unions had a Hobson’s choice,” he said. “They tried to pick the lesser of two evils.”