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Pew: Connecticut Has One of Highest Public Debt to Personal Income Ratios

by | May 17, 2016 12:30pm
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Posted to: State Budget, Pensions, State Capitol

Connecticut has one of the highest ratios of debt to personal income and the fifth highest ratio of state retiree health care liabilities to income, according to a Pew Charitable Trusts report released Tuesday.

The report, which measured each state’s pension, health care and debt costs as a percentage of personal income, put Connecticut’s total liabilities at $67.5 billion dollars or 30 percent of personal income.

The ratio of public debt to private income is 8.8 percent, which ties Connecticut with Massachusetts for the second highest rate of public debt. When pension, healthcare and public debt are totalled, Connecticut has the fifth highest rate of unfunded liabilities.

Connecticut’s pension woes are well documented. The state’s pension obligations are about 40 percent funded, according to the 2015 actuarial valuation of the fund. Only 7 other states have a higher rate of unfunded liabilities. The Pew report puts Connecticut’s unfunded pension liabilities at about $25 billion.

When politicians talk about state employee benefits, pensions often get the most attention, but other post employment benefits (called OPEBs), which are almost entirely healthcare, cost states nearly $20 billion in 2013. The total unfunded liabilities for OPEBs across all states was $630 billion in 2013.

Connecticut is one of just 13 states whose OPEB liabilities account for 80 percent of that $600 billion. Connecticut has already agreed to pay $22 billion in eventual employee retirement benefits, but only about one percent of the necessary funds have already been set aside.

The Pew report states that “setting funds aside for future benefits can both make costs more predictable for taxpayers and make benefits more secure for retirees. This may be particularly important for states with higher levels of benefits and liabilities.”

Connecticut has a very high levels of both benefits and liabilities. According to another Pew Charitable Trusts report from 2014, the state pays about 85 percent of health care costs for state retirees and their dependents, which comes out to about $1,300 per year per person. Dependents receive the same coverage as employees.

The state has taken steps to reduce the cost of retiree health care in recent years. Major changes to Connecticut’s employee health care plan in 2011 cut the annual expenditure by about 5 percent. The state spent $36 million less on retiree health care in 2013 than it did in 2011.

The switch to a new, self-funded plan called an Employer Group Waiver plan also brought the state both actual cost reductions and accounting benefits. The state also put in place premiums to incentivize employees to get preventive care, which reduced the use of costly emergency services.

In light of these changes, the Connecticut’s total healthcare liability was revised down $4.9 billion dollars between 2011 and 2013. However, the state still isn’t setting aside enough money to address these costs down the line. Connecticut is one of 22 states that fund less than 1 percent of their health care liability.

Like most states, Connecticut addresses retiree health care costs on a pay-as-you-go basis. Pre-funding these costs is preferable because once the money is set aside, it can be invested, which lowers long-term costs. But in an era of billion dollar deficits, it’s nearly impossible to set aside money for spending that’s still decades away.

As dire as Connecticut’s financial situation is, Alaska, Hawaii, and Illinois all face far more severe crises, with total unfunded liabilities ranging from 30 to over 50 percent of state income.

Pensions, health care, and debt still don’t represent the full picture of future state expenses. Few states keep accurate figures on the costs of deferred maintenance and infrastructure upgrades, so coming expenses are still hard to gauge. Connecticut also is one of the few states that assumes the cost of local school construction borrowing.

Connecticut will face many tough choices as the bill comes due for unfunded liabilities, and how to restructure debt and contracts will be one of those choices.

The amount the state will need to contribute to its state employee pension fund will continue to climb, reaching more than $2.5 billion per year in 2030. That scenario has prompted Gov. Dannel P.  Malloy, state Comptroller Kevin Lembo, and state Treasurer Denise Nappier to sound the alarm bells in search of a solution.

The state will have to pay more than $1.5 billion into the pension fund this year to meet the annually required contribution, of which $1.2 billion represents unfunded liability or an amortization payment toward past unfunded liability. An estimated 82 percent of that payment represents the payment for unfunded liabilities. The normal annual cost of pension benefits is less than $300 million.

The state labor unions are on board with making changes to pension funding.

Discussions about exactly how they will modify the fund to create more stability are expected to continue through the summer.

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