Connecticut cities and towns will face millions of dollars in added costs next fiscal year because of state-mandated changes in how municipalities must save for their workers’ pensions.
The Connecticut Conference of Municipalities warned legislators Monday that participating communities — which already are grappling with dwindling state aid — could see their pension costs rise by as much 16 to 21 percent. At issue is whether this would take place right away, or over five years.
“This change would result in significant state-imposed cost increases,” said Joe DeLong, CCM Executive Director. “CCM needs to shed light on these individual and collective cost increases faced by MERS-member towns in Connecticut.”
For example, according to CCM, Bridgeport faces $3.8 million in added charges. New Britain’s pension contribution could rise $1.7 million and Southington’s could jump $1.1 million.
The Municipal Employees Retirement System is the public pension plan provided by the state for participating municipalities’ employees. Nearly 9,400 active municipal workers and about 7,100 retirees participate in the plan, according to records on the state comptroller’s website.
About 80 municipalities participate in the program, along with more than a dozen regional school, planning, public safety and health programs.
Unlike the state’s pension plans for state employees and for municipal school teachers, the plan for non-education municipal staff is well-funded, holding enough assets to cover about 85 percent of long-term obligations.
Still, the State Retirement Commission, following recommendations made by pension actuaries, ordered some changes in how communities save for these obligations to strengthen the fund.
Chief among them was a reduction in the plan’s discount rate from 8 to 7 percent.
The discount rate is the assumed, average rate of return on pension fund investments over a long period of time, typically 20 to 30 years.
But if the pension fund is expected to earn less from its investments, than someone else must make up the difference. Usually that burden falls on the employer in the form of larger annual contributions.
The retirement commission recommended gradually imposing these added costs on cities and towns — estimated at 16 to 21 percent — over a five-year period.
Connecticut recently began reducing discount rates for its other pension funds, which also had been assuming average returns in excess of 8 percent.
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.
Some critics in financial services and academic circles have argued that, since the last recession, a better target is closer to 4 percent.