Pension debt proposals that exacerbate the problem
Two candidates compete against each other for office in one of Connecticut’s electoral districts. Each candidate seeks to distinguish himself by offering a purportedly creative solution to the problem of Connecticut’s massive and growing debt for public employee pensions.
Each deserves credit for an attempt to move beyond a naked demand that taxpayers pay more and receive less, but taxpayers should be informed about the potential pitfalls of each proposal, and should be aware that neither candidate is willing to address the fundamental problems creating and increasing the debt arising from Connecticut’s public employee pensions. Public employees must also understand that if the state fails to fundamentally alter the pension structure, they are likely to be the biggest losers.
One candidate, proposes what has come to be called a legacy trust. In simplified form, assets which the State owns would be sold or donated to an independent trust. The disposing entity, for instance, the DMV, would receive funds to reduce its already accrued pension liabilities, and would participate in some way, in on-going revenue generated by the asset. For example, assume the DMV was credited with donation of a surface parking lot valued at $2 million. The DMV would receive a credit in this amount against its outstanding pension debt. If the trust determined that the best use for the parking lot is a site for middle-income town houses, the trust would assume the risk and cost of this development, and the DMV would share in the proceeds – with the funds irrevocably dedicated to reducing pension debt.
What are the challenges with this model? It has not been fully tested in the U.S.; legal challenges will arise. Much will depend on which assets are selected to be put into the trust and how fairly they are valued. Then, since the initial value of any donated or sold asset, will be only a small fraction of the pension debt that must be paid down, the assets’ ability to generate on-going revenue is essential to success. This will depend on the competence, creativity and diligence of those running the trust – and their ability to withstand pressure for politically-favored, but not necessarily sound, investment strategies. Finally, the funds that may be generated through this strategy must be dedicated to reducing pension debt. Given the extra-ordinary conflict of interest which prevails in Connecticut’s legislature, and the legislature’s history of poor budgeting and reporting, this is a tall order. In April 2018, not even 12 months after passing a woefully late budget with a commitment to putting any surplus in a “rainy day” fund, the legislature debated ways to spend most of the unexpected surplus funds instead.
Consider also, a recent experience in Hartford. Hartford suffers from significant debt related to its pensions for public employees – more than $300 million. To reduce a portion of this debt, in 2017 Hartford decided to transfer a wonderful City asset – Batterson Park – to the city’s pension fund – to its unions. Hartford received a credit of $5 million for this transfer. Independent sources value this land at far more than $5 million. One source values the property at approximately $8 million – a 60% increase that properly belongs to the taxpayers; another source comments that if the land were subdivided and used for residential development, the land could be worth more than $100 million. Meanwhile, the pension fund has no reported plans to develop the property, and no obligation to do so, much less to share any resulting revenue with the city’s taxpayers. Once again in Connecticut, unions win; taxpayers lose.
A second candidate for State Representative for the same district, proposes sale-lease backs as a way to reduce the debt from public employee pensions which burdens Connecticut.
Sale-and-leasebacks are as much a financing tool as a real estate deal. In the most typical type of sale-leaseback, a corporate entity, imagine a GE or Pfizer, Sikorsky or IBM, realizes that it has a lot of money invested in office buildings or factories. It wants to continue using the buildings, but also wants to invest the money tied up in those buildings in new product development or something similar with a higher rate of return. It does a sale-lease back. It “sells” the building to an investor and simultaneously leases it back – typically for a long time. The buyer/investor is as much or more interested in the lease, as the building. Typically such leases are triple-net, meaning all risk of maintenance and repair belong to the tenant, with very high maintenance obligations – the buyer/investor wants to protect her collateral.
So how would these sale-leasebacks work to reduce Connecticut’s pension debt? Essentially tax payers are being asked to trade decrepit or obsolete buildings – with no associated lease obligations – for long-term leases, the equivalent of more long-term debt.
Remember that the fundamental economic driver of sale-leasebacks is the lease, not the sale. What buildings can the state lease and still occupy – state office buildings, DMV facilities? Many of these lack current designs or HVAC systems; many have been poorly maintained. The location – in a state with declining population and high taxes – does not add to value. Accordingly, taxpayers must expect relatively low asset valuations and high on-going lease payments. Sale-leasebacks could be a poor bargain for taxpayers indeed.
Beyond these pitfalls of both the legacy trust and sale-leaseback proposals is the fact each would continue to throw money into the black hole of Connecticut’s public pensions.
Neither candidate is willing to address directly the need for fundamental restructuring of Connecticut’s pensions.
Defined benefit plans must be eliminated; defined contributions plans must become the sole form of state-sponsored retirement savings. Compensation eligible for pension calculations must be capped. This will go a long way toward eliminating pension spiking, double-dipping, criminally unrealistic assumptions about returns on invested funds, and the other excesses of the public pension systems that have done much to turn Connecticut’s economy from one of the nation’s best to one of the poorest performers.
Connecticut’s voters and taxpayers must insist on real solutions for pension debt so that our economy can return to growth and new prosperity for all.
Marisa Manley of Westport was an independent candidate for governor.
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