Surging teacher pension costs will make Lamont’s next budget-balancing act tougher

The challenge of balancing the next two-year state budget got a bit harder for Gov. Ned Lamont recently after it came to light that Connecticut’s pension fund for municipal teachers will need an extra $200 million.

Lamont had hoped to get three years of relief from one of the largest — and fastest-growing — line items in the state budget by getting legislative approval to refinance Connecticut’s enormous pension debt during his first few months on the job last year.

But 2019 reforms to the system, including assumptions that retirees will live longer and that pension investments will average smaller returns over the long haul, proved more costly than the administration had projected.

Connecticut must contribute $1.44 billion to the teachers’ pension fund in the next fiscal year, according to the latest actuarial analysis of the pension fund, prepared by Cavanaugh Macdonald Consulting of Kennesaw, Ga. That’s nearly $200 million above the current contribution and — more importantly — $92 million more than state officials were counting on.

And in the 2022-23 fiscal year, the state payment swells to $1.56 billion — another $105 million above the administration’s original projections.

“As much as we try to reduce uncertainty in budgeting and planning, some flexibility is always required, especially when it comes to pension contributions,” said Office of Policy and Management Secretary Melissa McCaw, Lamont’s budget chief.

McCaw added that while pension forecasts, by nature, are extremely volatile, the larger costs facing Connecticut stem largely from the Lamont administration’s efforts last year to inject more fiscal realism into state finances.

For decades, Connecticut has assumed pension investment returns will average 8% per year or more over a 20- to 30-year period. And while many other states did the same, the trend in recent years has been to be more conservative. The 2019 refinancing lowered the average assumed return to 6.9%.

According to the latest actuarial analysis, state investments over the past two years earned 6.1%.

Connecticut also redesigned the pension system to recognize that retirees are living longer and therefore will collect benefits for more years. This change was the largest reason why the state must contribute extra dollars to the teachers’ pension in the coming biennium, according to state Treasurer Shawn T. Wooden’s office.

Lamont already has his hands full trying to balance the next two-year state budget.

Although a surging stock market has improved revenue projections for the coming biennium compared with forecasts during the early months of the coronavirus pandemic, Connecticut’s economy is still struggling.

The administration still estimates that revenues in the next fiscal year and in 2022-23 each will fall $1.3 billion or more shy of pre-pandemic expectations.

Connecticut’s two major pension funds — one for teachers and the other for state employees — both suffer from decades of inadequate funding.

This is crucial given that the money used to provide pension benefits comes not only from contributions from the state and from the workers but also from investing those dollars. In other words, if the state fails to make sufficient contributions — as it frequently did between 1939 and 2011 — then the state treasurer’s ability to amass investment earnings is severely limited.

With slightly less than $19.1 billion in assets, the teachers’ pension fund holds enough to cover 51.3% of its long-term obligations.

A 2015 study commissioned by then-Gov. Dannel P. Malloy warned that required annual contributions to these cash-starved pension funds, absent major changes, would triple or even quadruple by the late 2020s or early 2030s. This in turn would force major tax hikes and strip resources away from key priorities like education and health care.

Connecticut took steps in 2017 to smooth out the spiking payments the state employees’ pension system faced in the late 2020s, shifting more costs, plus interest, onto future generations of taxpayers in the 2030s and 2040s.

Lamont tweaked the changes to the state employees’ fund in 2019, but his major move that year involved a large-scale refinancing of the teachers’ pension fund.

Spiking costs projected for roughly a decade from now were reduced, and much larger payments were set between 2033 and 2049.

But while he was fixing the spikes scheduled to arrive a decade from now, Lamont also took a little relief for Connecticut and himself in the present — also at the expense of the next generation of future taxpayers.

Connecticut was paying $1.3 billion per year into the teachers’ pension during Malloy’s last year in office, and the annual payment was scheduled to approach $1.4 billion in Lamont’s first two years. Instead, Lamont used the refinancing to limit his first payment to $1.2 billion and to keep his second below $1.25 billion.

His original projections called for a third year of payments below $1.4 billion — $1.35 billion in 2021-22 — but the latest complications foiled that.

The average pension paid to a Connecticut teacher taking normal retirement last fiscal year was $58,406, according to the legislature’s nonpartisan Office of Fiscal Analysis. The average pension for early retirement was $51,750.

Municipal teachers in Connecticut do not receive Social Security, nor do they pay the 6.2% federal Social Security tax. They contribute 7% of their annual pay toward their pensions.

The average retiring teacher in Connecticut last fiscal year was 63 years old, had 25 years of service and was earning $93,767 per year just before leaving the job.

The teachers’ fund provides pensions to about 38,500 retirees and other beneficiaries.