Connecticut officials have spent much of the past three years restructuring tens of billions of dollars in pension debt that dates back more than 80 years.
But while that task will be wrapped up soon, Wall Street warned state officials on Wednesday that Connecticut’s finances aren’t out of the woods yet.
A new analysis from Moody’s Investors Services showed that Connecticut’s debt — even when compared with surging tax revenues — is worse than that of nearly all other states.
“Among the 50 states, Connecticut faces one of the most significant credit challenges stemming from unfunded retirement benefits,” Moody’s wrote in an analysis published Wednesday.
Connecticut’s unfunded pension and retirement health care obligations, coupled with other debt, represented 39 percent of its gross state product — the value of all goods and services produced — in 2018, Moody’s analysts wrote. This is the highest among all states.
Connecticut’s net pension liabilities through 2018 represented 286 percent of its annual revenues — a ratio worse than that of all other states except for Illinois.
Required annual contributions to pensions, retirement health care benefit costs, and payments on bonded debt, together consume nearly 30 percent of Connecticut’s General Fund. Two decades ago they were just over 10 percent.
And while pension debt refinancing will slow the growth of these costs, they now are expected to consume a hefty portion of state spending into the 2040s.
Moody’s praised Connecticut officials for some of their recent efforts to stabilize a problem created by decades of inadequate savings for public-employee pensions between 1939 and 2010.
The assumed rate of return on pension investments now falls just under 7 percent, while they exceeded 8 percent just a few years ago.
In 2017, Gov. Dannel P. Malloy and union leaders agreed to restructure payments into the state employee pension plan, scaling back projected increases between now and 2032, and boosting payments after than until the late 2040s.
Gov. Ned Lamont and the legislature approved a similar smoothing plan for the teachers’ pension this year. And Lamont also is asking unions to allow a second refinancing of the state employee pension plan. Those negotiations still are pending.
“This Moody’s analysis echoes much of what Governor Lamont has been saying. Our unfunded liabilities are a significant problem for this state and that is why we have taken action to adjust the Teacher’s Retirement System assumed rate of return and payment schedule, strengthen the State Employees Retirement System without changing benefits, and expanded successful programs to help lower the costs associated with retiree health care,” said Melissa McCaw, Lamont’s budget director.
“These unfunded liabilities have taken generations for the state to accumulate and it is essential we continue to make our full employer contribution each year and do not fall into the bad habits of the past.”
But Lamont and the legislature did take some relief this year, and they used the pension restructuring to do it.
After contributing $1.3 billion to the teachers’ pension fund last fiscal year, Connecticut was supposed to pay in nearly $1.4 billion this fiscal year and again in 2020-21.
But after the refinancing, there won’t be any increase.
In fact, Connecticut will contribute less — paying in $1.2 billion this fiscal year and $1.25 billion in 2020-21.
And all of those restructuring efforts come with a cost.
Scaling back contributions into two pension funds between now and the early 2030s deprives the state treasurer of funds that otherwise could be invested.
And these refinancing efforts, collectively, mean Connecticut likely will forfeit billions of dollars over this time period that future taxpayers must replace.
In addition, Connecticut’s ability to shift costs down the road is running out.
Moody’s warned that the state employees’ pension has relatively low assets compared to the benefits it must pay out. That means Connecticut has “very little flexibility” to trim pension contributions any more without creating serious cash flow problems.
In the meantime, though, Lamont and legislators used the pension relief to help avert a major projected deficit in the new state budget without increasing state income tax rates.
And Connecticut’s emergency budget reserve, commonly known as the rainy day fund, is projected to grow to a record level $2.2 billion by the end of September.
“Every responsible step we’ve taken in the last seven months—from the teachers’ pension restructuring plan to adding to our budget reserves—has been to solve for unrealistic investment return assumptions and decades of low contributions, which led us to where we are today,” state Treasurer Shawn Wooden said Wednesday. “As Moody’s points out, our recent actions have ‘greatly reduced the risk of underperformance,’ but there is still more work to do. We will continue to do the hard work necessary to stabilize the state’s balance sheet.”
What happened to the bond covenant issue on the teachers’ retirement fund?
That was the guarantee to purchasers of past bonds that the state would make the required contribution each year according to a schedule then in effect. That was supposed to prevent extending the payment period.
There were assertions before the legislative session that this problem could be averted, and apparently there’s a belief that it has been. But could a bondholder sue successfully?
A discussion of the current situation would be helpful.
“Required annual contributions to pensions, retirement health care benefit costs, and payments on bonded debt, together consume nearly 30 percent of Connecticut’s General Fund. Two decades ago they were just over 10 percent.”
That paragraph should scare everyone. At some future point, the promised pensions will have to be reduced. Guaranteed minimum pension COLA’s of 2.5 percent just can’t continue.
Interesting. It sounds like a classic conflict between a generalized interest of the majority (for reductions resulting in a better state fiscal picture with slightly lower taxes for many) against an acute interest of a highly organized, mobilized minority (against reductions that hurt retired teachers and state workers more significantly). Does this sound accurate? Where is public opinion – has any politician run on reductions or any organization done polling on CT voter opinion on the question of reductions in pension spending?
Because the pension promises have been reduced over time, the main expense is for people who have retired or who will retire soon. That obligation will have to be met.
And no change can be made until the expiration of the SEBAC agreement in 2027. Even then, there’s a question of whether the agreement will continue as is until a new agreement is reached and ratified by the people receiving the pensions. That would mean little modification.
The pension debt can be considered a thoroughly fixed expense. A politician who runs on renegotiating pensions, as I believe the past Republican candidate for Governor did, is being unrealistic.
Yes, future pensions have been reduced for newer state employees, however there are many young (low 60’s Tier I) state employees collecting massive pensions with guaranteed 2.5 percent COLA’s. These employees paid 2 percent of salary for that pension. I understand the SEBAC 2027 contract but if there are not some concessions (3 year COLA freeze maybe) the retirees may never see their full promised pension.
David Stemerman ran on buying out the pensions. I doubt this would work. Stefanowski had no plan. If Stefanowski is the Republicans pick in 2022, the Republicans will lose again. Stefanowski quotes his old boss GE CEO Jack Welch about how to rank and yank low performing workers. Did anyone tell Stefanowski that Jack Welch destroyed GE. The stock is $10 thanks to the vision of Jack Welch.
Kudos on good reporting. Without a major reversal in CT’s long stagnant economy there is no acceptable resolution of CT’s pension obligations. As will become ever more apparent during the next Recession.
Too bad no one in Hartford cares. I’ve already told my teenage kids to get out of here in time. Past gov’t and current gov’t in state has put so much on our backs and even more on my kids backs that there is no reason to stay here anymore. Of couse unless you are a teacher or state / municipal worker.