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.

Melissa McCaw, Gov. Ned Lamont’s budget director

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.

State Treasurer Shawn Wooden

“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.”