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Malloy, Unions Come to Agreement On Plan to Alleviate Pension ‘Cliff’

by | Dec 9, 2016 3:33pm () Comments | Commenting has expired | Share
Posted to: Labor, State Budget, Pensions, Taxes, State Capitol

Christine Stuart photo Gov. Dannel P. Malloy and a coalition representing state employees reached an agreement Friday that they say will help avoid years of steep increases in the state’s pension payment obligations leading up to a “cliff” in 2032.

The plan, which does not impact the benefits levels for state employees, would increase the state’s contribution over the next decade, but not as much as it would have to grow if the state did nothing.

If the state does nothing, the annual contribution would have to exceed $6 billion in 2032. In order for the state to meet those obligations, it would have to drastically cut services and/or increase taxes to unprecedented levels. The state’s annual contribution to the pension fund is already $1.5 billion. Under the new agreement it would increase at the most to around $2.3 billion annually.

The plan, which uses different actuarial techniques to smooth the escalating peak in payment obligations, also moves about $10 billion owed before 2032 into the future on a separate, 30-year amortization schedule.

“This agreement will help avoid a fiscal cliff and put the state on a more sustainable course the taxpayers demand,” Malloy said in a statement.

State Comptroller Kevin Lembo, who put forward his own proposals to reduce the spending requirements, said he’s glad Malloy and the unions reached an agreement and he is reviewing it.

The State Employees Bargaining Agent Coalition’s governing board approved the agreement Thursday.

“This agreement makes sense for the long-term retirement security of the public sector workers we represent and the taxpayers of Connecticut,” Ron McLellan, president of CEUI/SEIU Local 511, said.

The plan still needs legislative approval, and Republican lawmakers were dismissive of the deal and its proposed benefits to the state on Friday.

House Minority Leader Themis Klarides, R-Derby, said the proposed pension plan pushes off filling the gaping hole because it does not change the relationship state employees have with the state regarding their contributions to the plan.

“We appreciate all the work that went into this proposal but it does not include critical issues such as pension benefits and individual contributions that must be addressed if the state is serious about fixing the retirement system,” Klarides said. “These plans will grow increasingly unaffordable for future generations. Quite simply, our children and grandchildren will get stuck with the bills.”

Senate Republican Leader Len Fasano said the proposal is an “incomplete bailout of a pension system that’s completely out of control.”

He said simply refinancing part of the debt under a new amortization schedule is not the structural change Connecticut needs.

“This package will add billions of dollars in new costs onto taxpayers beyond what is reflected in the governor’s summary,” Fasano said. “It’s not a solution and taxpayers deserve better.”

Fasano warned that Wall Street credit rating agencies may not appreciate the proposal because it moves some of the unfunded liability into a new amortization schedule.

“Standard & Poor’s has already raised concerns about proposals to increase and extend unfunded liabilities,” Fasano said. “If this credit rating agency didn’t like this idea the first time they heard it, what makes anyone think they will view it differently now?”

Kelly Donnelly, Malloy’s spokeswoman, fired back at Fasano’s statement.

“We thought that given the changing nature of his caucus, Sen. Fasano was moving down from the cheap seats and that he intended to actually get involved in the real work of governing. Apparently not,” Donnelly said. “While the administration has been working toward a solution on this problem, Senator Fasano has done nothing. He has never offered a realistic plan for saving Connecticut from the $6.6 billion pension payment in 2032 that our plan will avoid.”

Malloy’s administration had talked about bifurcating the pension system with a closed plan for Tier 1 employees, who account for most of the unfunded liability, and an open plan for Tier 2 and Tier 3 employees. The Tier 2 and Tier 3 system is about 95 percent funded. The unfunded pension liability — or at least $15 billion of the $25 billion liability — can be attributed to those Tier 1 employees, many of whom have retired.

Wall Street rating agencies were skeptical of that solution, which was proposed as part of a report Malloy commissioned from the the Center for Retirement Research at Boston College.

The last actuarial analysis of the state employees retirement plan was completed in 2014. An analysis is done every two years and the next one will be released this month.

The 2014 analysis found that the plan was funded at 41.5 percent, and most of the unfunded liability is attributed to employees hired before 1984.

There are about 2,000 active Tier I employees still working for the state and nearly 30,000 have retired. They account for about $11 billion in unfunded liabilities.

RELATED:

Labor, Malloy Find Common Ground On Pension Funding

Lembo: Policymakers Will Have To Make Choices In Future About Unfunded Pension Liability

Malloy Lays Out His Vision, Sends Message To Legislature on Taxes & Pensions

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