OP-ED: Retiring The Decades-Old Practice of Unfunded Liabilities
Public services and the professional work force needed to deliver those services to our citizens are at the heart of effective state government. Indeed, Connecticut has provided generous benefits – including pensions and health care – to our retirees and their dependents to help attract and retain individuals committed to serving the public.
This is a covenant state government has made – and rightfully so – with its employees. However, the decades-old practice of deferring or underfunding contributions to retirement accounts and the burgeoning costs of these benefits to our taxpayers require fundamental changes in the way we structure and finance post-employee benefits.
The problem is not unique to Connecticut. Governments across the country, and at all levels, are struggling with significantly underfunded pension, health care and other benefits. Nationally it is a $1 trillion problem. Connecticut’s unfunded liability, which has accumulated over decades, is nearly $34 billion, and of that more than $25 billion is for retiree health care. About $9 billion is for retiree pensions.
My Administration has taken critical steps to address the issue. My budgets have generally insisted on making full contributions to retirement accounts, although the current recession did require some limited, agreed-upon pension deferrals. In addition, in 2007, I strongly supported and signed into law a bill that requires the state to make full annual contributions to the Teachers’ Retirement Fund.
The 2009 agreement I negotiated with the State Employee Bargaining Unit Coalition (SEBAC) resulted in significant and long-term concessions that will have a positive effect on future obligations. That agreement created the “Rule of 75”, which now requires that the combination of a retiree’s age and years of service must equal at least 75 before he or she can receive health care benefits. The agreement also requires that employees with fewer than five years of service and all future employees contribute 3 percent of earnings annually toward a future retiree health care fund for the first 10 years of their employment. These are critical changes, but far from adequate to fully solve the problem.
Earlier this year, I established the State Post-Employment Benefits Commission, a broad-based commission of state and union officials and financial experts to seek innovative and cost-effective solutions to the growing debt. Their ongoing work has been thoughtful and comprehensive and their research could very well result in solutions that offer a combination of approaches – some administrative, some legislative and others that will require collective bargaining. Future Governors, Legislatures and generations of taxpayers will benefit from their efforts.
To that end, I have offered the Commission a list of suggestions that I believe will confront and address our unfunded liabilities problem. These suggestions range from capping pensions at $100,000 a year to establishing a defined contribution plan for new employees. It is estimated that some of these recommendations will save the state $300 million a year, while others would have about $3 billion in longer-term effects. My recommendations include:
—Redefining the “Rule of 75” to a “Rule of 80” for retiree health insurance and increase the premium share for every 5 years of service below 25;
—Establishing a rule there would be no Cost of Living Adjustment (COLA) in years where there are negative earnings in investments;
—Increasing by an average 3 percent employee contributions toward both pension and other post-employment benefits (OPEB), which would generate an additional $95 million a year for the pension plan and $78 million a year for the retiree health plan; moreover, these revenues would increase further as salaries increase;
—Increasing the early retirement age to 60 and increasing the normal retirement age to 65 would result in an estimated savings of $100 million a year in the state’s annual contribution to the retirement funds – known as the Actuarially Required Contribution, or ARC;
—Calculating a retiree’s final average salary over five years instead of three years would result in annual ARC savings of about $22 million;
—Capping pensions at $100,000 a year would result in ARC savings of about $500,000 a year;
I am extremely grateful to the members of the Post-Employment Benefits Commission for their many months of hard work on this issue. Now is the time for serious and open dialogues toward finding solutions, for public hearings on all recommendations. Resolving this serious problem requires that recommendations not be limited to just this Commission or this Governor, but include all who have a stake in the future of this great state – employees, policymakers and taxpayers.