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Connecticut’s Unfunded Pension Liability Increases To Worst Level In Years

by | Jan 6, 2017 6:29am
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Posted to: Labor, State Budget, Pensions, Taxes

State officials weren’t surprised Connecticut’s unfunded pension liability increased to its worst level in several years even after assuming the recent changes negotiated by Gov Dannel P. Malloy and the state labor unions.

In 2016, according to a report from Cavanaugh Macdonald Consulting LLC, only 35.5 percent of the the State Employees Retirement System was funded. It’s the first time in three decades the funding level of state employee pensions has fallen below 40 percent.

In 2014, it was funded at 41.5 percent and in 2012 it was funded at 42.3 percent, which still made it one of the worst funded pension systems in the country. Most experts agree that a fiscally sustainable system should be at least 80 percent funded.

Chris McClure, a spokesman for Malloy, said the report “validates the concerns we have been raising,” and “speaks to the necessity of the agreement we reached” last month with the labor unions.

Last month, Malloy announced plans to help the state avoid having to pay $6 billion in a single year to the pension fund.

The plan uses different actuarial techniques to smooth the escalating peak in payment obligations. It also moves about $10 billion owed before 2032 into the future on a separate, 30-year amortization schedule. And it lowers the assumed rate of investment return from 8 percent to 6.9 percent. By lowering the investment return, the pension fund won’t lose money if the market does worse than 6.9 percent. Many have felt an 8 percent investment return is unrealistic and some feel even 6.9 percent is still optimistic.

“Now that we are measuring our pension commitments using a more realistic investment return assumption, our valuation more accurately portrays the serious state of our underfunding,” McClure said. “It is clear from this report that we can no longer shoulder today’s taxpayers with all of the burden of past underfunding, and can no longer stack the unfunded liability into an unrealistic amortization window that would cripple the state’s budget and force destabilizing tax increases or service cuts.”

State Comptroller Kevin Lembo said the report offers a “more realistic view of where we are.” He said now that the state has the information it can move forward with plans to fix it.

Lembo said the plan agreed to by Malloy and the unions is the right plan to help avoid the $6 billion cliff in 2032.

“This valuation doesn’t change that strategy,” Lembo said.

During his speech Wednesday Malloy talked about how frustrating it is that when the state pension system was created 80 years ago not a single dime was deposited into the account for the first 30 years. More recently from 1990 to 2011, it failed to contribute the required amount.

That means of the $1.65 billion Connecticut will pay next year into the system, 78 percent or $1.3 billion, is what the state is “paying to make-up for what past administrations and past legislatures failed to do,” Malloy said.

Republican legislative leaders said the deal Malloy struck with the unions to smooth the fiscal cliff won’t solve the problem and is simply a distraction from the real problem which is the rich benefit package state employees receive.

“We have a serious problem that needs immediate attention,” Senate Republican President Len Fasano, R-North Haven, said.

He said eliminating overtime income from pension calculations and increasing employee contributions need to be part of the conversation if the state ever wants to pull itself out of this mess.

In Connecticut, however, the governor has the unilateral authority to negotiate pension and health benefits with the state employee unions. Fasano said that has to change and at the very least the legislature needs to start voting on these agreements.

The agreement between Malloy and the unions regarding the pension funds will automatically go into effect in 30 days if the legislature declines to take a vote on it. Fasano and House Minority Leader Themis Klarides are urging their Democratic colleagues to vote on the package. The agreement was filed Wednesday with the clerks of the House and the Senate, which starts the 30-day clock ticking.

“The valuation of state employee pensions has hit an all-time low and the unfunded liability grows every day, “Klarides said. “This is not a question of the state putting more money into the account, we must overhaul the entire system before it goes broke.”

She said a major overhaul is critical to ensure the viability of the system into the future.

“We strongly urge the legislature to support our agreement with SEBAC to avoid this fiscal cliff, and resolve the unfunded liability responsibly, predictably, and fully,” McClure said.

The report says there are 50,019 active members participating in the pension system with an average salary of $74,387, an increase of 6.6 percent over the last two years.

There were 48,191 retirees who receive benefits in 2016.  That’s up from 2014 when there were only 45,803 retirees. The average benefit per retiree is $36,226 annually and the average age of Connecticut retirees is 70.

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