State Comptroller Sean Scanlon Thomas Breen photo

After overwhelming state finances for more than a decade, mandatory contributions Connecticut’s pension funds for state employees and municipal teachers appear to have stabilized.

But even as pressures on state finances reach equilibrium, another pension fund, which serves more than 10,000 municipal employees and retirees, has left many cities and towns feeling the fiscal bite.

State Comptroller Sean Scanlon announced recently the formation of a working group to find ways to help communities deal with surging costs of the Connecticut Municipal Employees Retirement System, or CMERS. But a second and equally important directive to this group, he said, will be to help preserve the retirement benefit program.

“I believe in these pensions,” said Scanlon, whose father was a police officer and whose grandfather was a firefighter.

But at the same time, he noted, “this is a big deal for towns.”

Municipalities will be notified formally of their contribution rates later this week. But Scanlon said many communities already have seen projections showing double-digit percentage hikes — and this comes after many years of sizable increases.

For example, the comptroller said, Winchester is looking at a more than 20% increase in the coming budget cycle, a problem Scanlon called “not uncommon” among the 107 municipalities that participate in CMERS.

An Ellington official recently notified Scanlon’s office that its contribution rate has grown 72% since 2017.

The regular contributions required annually of member municipalities grew from a collective $82 million in the 2017-18 fiscal year to $134.8 million in 2021-22.

“The system is broken. It needs to be fixed,” said Betsy Gara, executive director of the Connecticut Council of Small Towns, who warned that rising costs ultimately will take a toll on municipal staffing levels. “If you can’t rein in the costs, towns are going to have to look at cutting back on personnel.”

At first glance, the CMERS pension fund, created by the state in 1947 to help municipalities, has its strong points. According to the latest actuarial valuation, it has enough assets to cover 69% of its long-term obligations.

By comparison, the pensions for state employees and for municipal teachers are 46% funded and 57% funded, respectively.

Investopedia, a New York-based financial media website, says many industry experts cite 80% as the benchmark for a fiscally healthy pension fund.

But the American Academy of Actuaries calls this “The 80% Pension Funding Myth” and says the funded level alone cannot dictate how stable a fund is.

And in the case of CMERS, there are several factors contributing to the current crisis.

In 2018, the state changed the assumed rate of return on pension fund investments from an annual average of 8% over a 25-year period to a more conservative 7% — following a trend employed by most states in recent years.

But adopting more cautious expectations about investment returns reduces the fund’s projected assets, increases its liabilities and usually triggers an increase in required contributions.

In the early 2000s, the legislature and then-Gov. John G. Rowland decoupled cost-of-living adjustments for pensions from investment performance. In other words, even if investment returns are poor, that doesn’t limit COLA adjustments.

This was a perfect formula for trouble two decades later. While the financial markets slipped in 2022 and the fund’s investment return was a negative 8.9%, inflation in the U.S. hit a 40-year high, topping 9% last June. That combination of investment losses and inflation-driven COLA increases also translated into the need for higher contributions to the pension fund in the coming years.

Further complicating matters, Scanlon noted, is that many municipalities — like state government — have seen increased numbers of retirements among their veteran workers. The number of inactive — nonworking — members of the CMERS system has risen dramatically over the past six years.

What hasn’t happened over that period, according to Connecticut Conference of Municipalities Executive Director Joe DeLong, is any serious legislative attempt to scale back retirement benefits.

While pension and/or retiree health care benefits for new state workers were negotiated with unions in 2009, 2011 and 2017, nothing of the sort has occurred for the CMERS system.

The 2019 General Assembly did approve a six-year schedule of gradual contribution rate increases for municipal employees in the CMERS plan, running from 2020 through 2025.

But DeLong said municipalities have warned for more than a decade that the program’s long-term sustainability was at risk without a more comprehensive approach to reform that included curtailing benefits for new hires.

The legislature’s Labor and Public Employees Committee consistently has blocked such efforts, he said, calling the panel “an extended arm of organized labor. It’s not structured to look at labor policy and see what works. … We can’t really even get a hearing on the issue.”

Gara said her organization also would like to see changes in benefits for new hires explored.

And Rep. Tim Ackert of Coventry, ranking House Republican on the labor committee, said towns have a legitimate beef.

Majority Democrats in the legislature “don’t want to upset organized labor,” Ackert said, adding that unless benefit levels are reviewed, “there is absolutely no way it’s sustainable” a few years from now.

But labor advocates counter there are holes in this argument.

State income tax rates were last increased in 2015 and 2011. Since then, governors and legislatures have relied heavily on labor to solve state government’s fiscal problems.

Besides the 2017 union concessions deal, attrition has been used to shrink the workforce and control payroll costs.

According to data obtained by the CT Mirror from the state Office of Policy and Management, all Executive Branch agencies — excluding public colleges and universities — had collectively filled 25,700 of the 30,080 positions authorized for them in the state budget just before the close of the last fiscal year.

The 17% vacancy rate was almost double where it stood two years ago, when 9.4% of jobs were empty. 

Many legislators have joined unions in saying most state agencies now face staffing crises, particularly in the human services field.

Sen. Julie Kushner, D-Danbury, co-chairwoman of the labor committee, said cutting back retirement benefits could push towns into the same fix many state agencies already face.

“I don’t think that’s a great solution,” she said. “As we cut back on those benefit packages, it really puts pressure on replacement hiring.”

A group of six labor unions and labor advocacy groups issued a similar warning this week.

“In the midst of a growing staffing crisis in towns and cities, where we are losing thousands of critical public service employees and applicants to higher paid jobs in the private sector, it is irresponsible and tone deaf for CCM to suggest lowering pension benefits by adding tiers,” wrote the group, which includes Council 4 of the American Federation of State, County and Municipal Employees, CSEA SEIU Local 2001, Municipal Employees Union Independent Local 506, the Connecticut Coalition for Retirement Security, A Better Connecticut Institute, and The Recovery For All CT coalition.

“If the pandemic has proven anything,” the group added, “it is that Connecticut residents can’t get the services they need without experienced public service workers to deliver them.”

Kushner added that, despite the increased contribution rates facing towns, the CMERS fund itself is not in dire straits with a sound funding ratio.

She also noted state government is in good fiscal shape should it want to help towns more. Connecticut holds a record-setting $3.3 billion in its rainy day fund, is expected to close this fiscal year on June 30 with $3.2 billion left over and is projected to finish in the black in each of the next two fiscal years.

“I don’t think we’re in any kind of an emergency situation,” Kushner said.

Scanlon said his working group would include representative of labor and officials from municipal and state government.

“I’ve told both sides that everything should be on the table,” he added.

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.