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Yankee Institute Says Unfunded Pension Liability Larger Than Reported

by | Sep 2, 2014 5:30am () Comments | Commenting has expired | Share
Posted to: The Economy, Labor, State Budget, Pensions

A new analysis of Connecticut’s unfunded pension liability by the conservative Yankee Institute claims that its unfunded liability is much higher than an actuary for the state has estimated.

The analysis conducted by J. Scott Moody, CEO of State Budget Solutions, and Wendy Warcholik, of the Maine Heritage Policy Center, concluded that Connecticut’s unfunded pension liability is much greater than the $24.5 billion reported by the state. Moody and Warcholik found the “real unfunded pension liability is $76.8 billion, or 213 percent higher than current forecasts.”

The state estimated in 2012 that pension obligations for active and retired state employees, teachers, and judges totaled $48.2 billion.

“Yet, the state has only set aside $23.7 billion in assets to pay for these obligations,” Moody and Warcholik wrote in the report. “The pension system reports an unfunded liability of $24.5 billion. But our study shows that liability is more than three times that amount.”

The most recent actuarial valuation of the pension funds showed that as of June 30, 2012, the State Employees’ Retirement System was funded at 42.3 percent and the Teachers’ Retirement Fund was funded at 55.24 percent.

That means the State Employees’ Retirement System had $9.7 billion worth of assets, which is enough to cover 42.3 percent of the $23 billion in liabilities. The Teachers’ Retirement Fund did slightly better because in 2008 the General Assembly agreed to put $2 billion on the state credit card to help make payments to the fund. That means the teachers’ fund had $13.7 billion in assets, which is enough to cover 55.24 percent of its $24.9 billion in liabilities. Experts say an 80 percent funding level is considered healthy.

The next actuarial valuation of Connecticut’s funds isn’t expected to be completed until after the November 2014 election.

Moody and Warcholik said the state set aside $144 million in 2013 for other retiree benefits, which are facing a liability of $22.7 billion. In order to meet its obligations they found the state would have to increase its pension and other retiree benefit contributions by $2.8 billion per year.

The Yankee Institute report concluded that in order to find the additional $2.8 billion per year that the state would need to meet its increased obligations, it would need to raise taxes or put new employees into a 401K type pension system.

But a union spokesman doesn’t believe the Yankee Institute’s report.

“This is nothing more than partisan political posturing by an organization to weaken the ability of unions to represent workers and put an end to real pensions,” Larry Dorman, a spokesman for AFSCME Council 4, said last week.

Dorman said Connecticut’s pension system actually benefits the state because retirees contribute to the economy.

He cited a report by the National Institute on Retirement Security, which found that 110,374 Connecticut residents received a total of $3.7 billion in pension benefits from state and local government in 2012.

“Retirees’ expenditures from these benefits supported a total of $6.6 billion in total economic output in the state, and $4.3 billion in value added in the state,” according to the report.

Gov. Dannel P. Malloy, who is running for re-election against Republican Tom Foley, has said he wouldn’t ask state employees for more concessions. The 2011 contract he negotiated with them for health and pension benefits goes through 2022.

“A deal is a deal. We’ve made a deal and we’re going to honor that deal,” Malloy has said of the 2011 State Employees Bargaining Agent Coalition labor agreement.

In 2011, state workers agreed to a two-year salary freeze and other concessions, including an increase in contributions to their pensions, in exchange for four years of protection from layoffs.

Malloy has said the deal, which was criticized for relying heavily upon difficult-to-quantify savings, has been undervalued.

“Quite frankly it’s a tremendously valuable deal. I think what’s misunderstood — perhaps purposefully so by some folks — is how much total savings that has brought about and that it really is the biggest reason we can look at our benefit package as sustainable,” he said.

Foley has said Malloy can’t be trusted when it comes to concessions.

“In 2010 Dan Malloy signed a public union questionnaire saying he wouldn’t seek concessions,” Foley said in June. “After being elected, he promptly broke that promise. Why should the unions believe him this time? As the saying goes, “fool me once, shame on you. Fool me twice, shame on me.”

However, Foley doesn’t necessarily believe the Yankee Institute’s recommendations will help the state fund its pension liabilities.

Foley has already ruled out a tax increase to close a projected budget deficit and he said last week that he’s not sure moving state employees to a 401K type plan would actually be beneficial.

“All it does is shift the risk on investment returns to retirees or the state,” Foley said.

He said structuring the benefit plans differently won’t necessarily make them less expensive, and he doesn’t have a “preference” regarding defined benefit plans or defined contribution plans, such as 401Ks.

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(24) Archived Comments

posted by: meridenite | September 2, 2014  9:53am

I have one word for dorman and malloy, Detroit.

posted by: Bluecoat | September 2, 2014  9:54am

At what point will CT have a real and open discussion about this problem?
State retirees will have to take a reduced payout so that we can scrap the current system and start over,
If you move out of CT, especially to a State with no income tax, you lose 25% of your retirement,
I don’t think we can continue on this path to continue to raise taxes on everyone for the benefit a few state workers. Although it seems like we have 1/4 of the population the State is either a retired or current state worker. It would be nice to know what this number is. Do we have a hundred thousand or seven hundred thousand current or retired State Employee count?

posted by: Joebigjoe | September 2, 2014  9:56am

No different than the Dederal level. We arent 17 trillion is debt but with unfunded liabilities probably 70-80 Trillion now, but hey let’s just keep on spending. How dare those evil Tea Party people warn us????

posted by: thomas hooker | September 2, 2014  9:57am

This is nonsense.  What the Yankee Institute doesn’t tell you in the abbreviated version of the report is what discount rate they used to get to this huge unfunded liability.  And, of course, the only way they can get to this scary number is to crank down the discount rate.  In the long version they reveal that it is 5%.  That is extremely low, and far lower than even most wealthy municipalities in Connecticut use.  In short, they pretend that the gains in the stockmarket, in which the fund invests, are illusory.  They’re not.  Gains have been in the near double-digits for the past four years.  Further, in most decades, equity markets have managed close to double-digit gains.  So the Yankee Institute is just making up a number in order to make the future look bad.  In fact, if you look at the full report, the highest level of funding of any state is just 54%.

Further, they are pretending that the unfunded OPEB liabilities are the same as unfunded pension fund liabilities.  They’re not.  In fact, almost no state has funded its OPEB obligations even in double-digits.  So Connecticut is not an outlier in terms of not funding OPEB. 

Further, YI fails to point out that Governor Malloy has funded both the ARC for the state employee pension fund and the teachers pension fund 100% since he took office.  The chronic underfunding that lead to the low level of funded liabilities were the fault of Rowland and Rell.  Indeed, in 2008, Rell borrowed $2 billion to fund the teachers pension fund, increasing one liability to reduce another. 

The Yankee Institute is just using a made up discount rate to scare policy makers into slashing retirements for teachers and state employees.  The actuarial figures presented by the state are real, and reliable.

posted by: Bluecoat | September 2, 2014  10:25am

Is CT following in the footsteps of Illinois?
By Kelly Riddell - The Washington Times - Monday, September 1, 2014

If the Illinois Teachers Retirement Service (TRS) had to pay out all of its pensions today, it could only afford to give its members 40 cents on the dollar.

Yet the number of six-figure pensions TRS has been doling out has increased 24 percent this year compared to last, with about 6,000 retired educators collecting more than $100,000 annually, according to records obtained by Open the Books, an online aggregator of local spending that tracks educator salaries, pensions and vendor spending.
The group’s Labor Day report found more than 100,000 retired Illinois educators had been paid back what they invested into the system just 20 months after leaving work, a financial burden linked to union collective bargaining, which can cost taxpayers $2 million or more per teacher over the course of retirement.

Read more: http://www.washingtontimes.com/news/2014/sep/1/generous-teacher-pensions-continue-as-illinois-fin/#ixzz3CAVoGNjP
Follow us: @washtimes on Twitter

Read more: http://www.washingtontimes.com/news/2014/sep/1/generous-teacher-pensions-continue-as-illinois-fin/#ixzz3CAVTX6Aa
Follow us: @washtimes on Twitter

posted by: DrHunterSThompson | September 2, 2014  11:13am

THooker, well said. Nonsense for sure. Amazing how folks grab the partisan bait and then make fools of themselves. They’d be better off twisting one up and going to the beach!


posted by: rpk31 | September 2, 2014  11:25am

@thomas hooker where exactly are you getting the impression that a 5% discount rate is unrealistically low? The past 4 years of returns could not be more misleading for 2 reasons: 1)They came after the stock market completely crashed by about 50%. A significant rebound was going to happen regardless of the underlying fundamentals in the economy and 2) The massive influx of cash into the economy as a result of all the Fed’s QE had to go somewhere. Interest rates have been near zero all over the developed world since 2008, that cash had to go somewhere so it poured into stocks. Now that QE is winding down and will soon stop completely, you will see markedly different returns in the stock market.

That aside, no competent pension fund on the planet uses an 8% discount rate, which is what the state currently uses. Private companies that still have defined benefit plans, which are few and far between, use roughly the 5% rate proposed by the YI. However, even this is agressive, as historically the discount rate used in pension plans was the risk-free rate, also known as the yield on 10 year Tresuries, which for the past 5 years has been anywhere from 1.5-3.5%. A truly responsible government would be using this number, not a number like 8% that is totally unsustainable over the long term.

posted by: ocoandasoc | September 2, 2014  1:27pm

First off, while the State of CT’s numbers are overly optimistic, the Yankee Institute’s are overly pessimistic. And the problem with that is that it lets union spokesmen like Larry Dorman point out the errors and lull CT residents (who really like being lulled!) back into a false sense of security.  A true look at investment performance history and retirement trends paints a dire picture for the State of CT even under fairly optimistic scenarios. Their pension obligations are less than 50% funded and headed in the wrong direction. A bump in the State’s economy (you know, the one they incorrectly predict every year) would delay the inevitable. A stock market crash a la 2008 will make it more imminent. So you don’t need to jimmy up the stats to make it look even more catastrophic, unless of course you’re just looking for attention a few months before an election.

In my political writing over the past 15 years I’ve said that unfunded pension liabilities and dishonest accounting practices and projections are CT’s biggest problems. And you don’t have to go to a right-wing think tank to find folks who agree with that assessment… just ask any public accountant or financial analyst. (And judging by recent posts in the Hartford Courant’s web discussion of “who’s leaving CT and why,” a lot of CT folks are starting to see the handwriting on the wall. The debt service CT residents will have to pay along with the percentage of huge pension benefits that will have to be paid out of annual tax revenues will eventually result in either a financial meltdown or force the State to renege on its pension promises. Middle class public sector working people are finding they cannot afford to retire yet see their State and municipal employed friends getting six-figure pensions… and many of them are taking those generous CT taxpayer-funded benefits and moving South!  At this point, I just don’t see a way out, regardless of who is elected Governor.

It’s interesting that here in the South legislators are pointing to the per capita debt, unfunded pension liabilities, and skyrocketing tax burdens in states like CT, MI and IL as a cautionary tale for their residents as to the consequences of liberal spending policies gone amuck.  Just because these mostly Republican lawmakers are less socially progressive than many of us would like is not grounds to discount the value of their financial conservatism. Here in TN we have the lowest per capita debt of any State (less than a tenth of CT’s!) and our pension liabilities are 92% funded. And that’s with no income tax, no car tax, and property tax rates that are about 70% lower than those in the Northeast states.

posted by: CT Jim | September 2, 2014  3:22pm

@rpk31, Your being more than slightly dishonest here though never expected anything less. But during the Wall Street crash where you correctly stated the market crashed by 50% you never mentioned that CT’s pension fund was not being effected by anywhere near that rate. Also you state that private pension funds use the 5% rate of return the YI uses is a total fabrication. and most use the standard 8% to 9% rate of return that CT is using. So would it be correct to assume the the YI institute is sour on the economy as a whole? are they recommending that people avoid the stock market? Because OMG a mere 5% rate of return is not something I’d like to invest my hard earned dollars in, I mean it’s not worth gambling on something with that small of an outcome. Might as well head to the casino and put it all on red. Bottom line is these guys are trying to destroy pensions and are afraid that if the improvements over the last 4 years continue they may never be able to destroy pensions for teachers and other public sector workers. Not surprised that an institute that gets a lot of their funding from organizations connected with the Koch brothers and other extreme right groups would come up with another bogus study.

posted by: Joebigjoe | September 2, 2014  3:30pm

Before someone goes off on Occo again and talks about the great education we pay for in CT as being one of the reasons for our high taxes I have one question.

If our education system is so superior then why do I work for a global company and work with people from almost every other state who anyone would define as “smart as hell” and certainly smarter than me?

CEO’s and Sr Execs in all industries don’t only come from the Northeast. Our education system we pay tons for is not the “be all end all”. I have two engineers living on my cul de sac, an atty, and a person that is upper mid level management in an insurance company and not one was educated in the Northeast.

posted by: Suzanne Bates | September 2, 2014  4:17pm

I thought I’d jump in the conversation. As the policy director of the Yankee Institute, I just wanted to correct a few assumptions here. First of all, we get 90 percent of our money from in-state donors - just to clear that up. The Koch-money thing is a favorite talking point of the people who don’t like the YI, but it just isn’t true. Secondly, the 5 percent discount rate is used, because it is considered a way to protect taxpayers from the volatility of the markets. If you look at our treasurer’s reports since 2008 - http://www.ott.ct.gov/pension_comprehensive_annualreport.html - you’ll see we only earned an average rate of 3.75 percent since 2008. We had negative growth in 2008, 2009 and 2012. Betting on an 8 percent return on investment is gambling with taxpayer dollars, and it is what has gotten cities like Detroit into trouble. We would like the state to take a safer approach.

And while it is true that Gov. Malloy has paid the annual required contribution (ARC) the past couple of years, while Rell and Rowland didn’t, he has not kept up with the promises he made about putting additional funds toward pensions when he signed the state employee contract in 2011. 

This is a problem. We can argue about the solutions, but there is no getting away from the fact that our pension debt is a problem.

posted by: CT Jim | September 2, 2014  4:48pm

joebigjoe, so there are 5 houses on your cul de sac? Really?? And they are all super intelligent? You’ve come up with some really crazy scenarios before but the chances of 1) five homes on a cul de sac 2) all 5 home owners being super intelligent 3) all 5 being educated outside of the northeast 4) all 5 just happen to be your neighbor??  I Got some advice for you PLAY LOTTO!!!! You have a better shot of winning both powerball and mega millions than the scenario you just drew up. We all know your trying to destroy workers pensions and your trying to get republicans elected but the pure fabrications associated with your scenarios are becoming nauseating. Please just stop.

posted by: joemanc | September 2, 2014  4:58pm

Many towns, cities and even states came close to bankruptcy during the last recession. A few cities did though.
Many individuals and governments, including CT, are just not prepared for a rainy day. Unfortunately, our bubble economy is built on a house of cards. We’ve had an internet and housing bubble collapse that caused serious damage to the government’s finances and pension funds. And I’m afraid the current bubble will be the biggest one to burst yet. Many, many more governments and pension funds will go broke this time around.

posted by: whatsprogressiveaboutprogressives? | September 2, 2014  7:11pm

Public sector employees rely on a vibrant healthy private sector economy. In recent years, the economy has been far from that. Yet we continue to see growing government employee ranks and dwindling private sector jobs,at least here in CT. This puts a greater financial burden on those left here to foot the public sector payroll bill. It has gotten out of control and will continue to get worse as long as team Malloy and a majority (D) legislature are re-elected.

posted by: Joebigjoe | September 2, 2014  7:23pm

CT Jim those are the facts but then again you’re on the left so you dont go by facts. Sure other than myself the odds of all of my immediate neighbors on my cul de sac being from out of state is rare but its a small cul de sac first of all and second of all is I work with people all over this country and they arent a bunch of toothless morons from non-refined states. I’ve also been to India and China a number of times and yes there are alot of uneducated people there but the professionals, again not from Connecticut, are rpetty bright.

posted by: PaulW | September 2, 2014  7:26pm

Bluecoat, the numbers you’re asking for are on page one of the actuaries report in both the state employees report and the teachers report. For state employees as of 6/30/12, 47,868 active (working) members of the various pension plans, 43,887 retired members, 1561 deferred vested members which I think means eligible but not working for the state nor able to collect at the moment.

For teachers as of 6/30/12, 49,808 active, 32,294 retired.

On the state employee side, I imagine the next actuarial report will show that virtually all of the Tier 1 (the most valuable plan) employees will be retired so that dollar number should start decreasing fairly soon.  The benefits of all the other plans that came later (employed after 7/1/84) are significantly lower. In 2012 there were about 17,000 retirees over the age of 70.  The report does not go into mortality rates in much detail however.

posted by: rpk31 | September 2, 2014  8:11pm

@CT Jim here is just one example of a private company in CT (United Illuminating) that still has a defined benefit plan. They have two plans, one uses a discount rate of 5.05% and one uses a rate of 5.3%.


I would challenge you to provide one private company that uses a rate of 8% or higher. As you seem to think there are many of them, this shouldn’t be difficult.

posted by: CT Jim | September 3, 2014  1:08pm

@rpk31, again you are trying the tried and true right wing method of mixing apples with oranges add a little deception and maybe you can stick it to some workers. Fact is smaller companies like united illuminating are seeing lower estimated rates of returns primarily because they don’t have the same buying power much larger plans do because not only does your plan need to turn a profit but it also needs to stay diverse to protect against putting too many eggs in one basket. Larger plans like those at the Ford motor company and others see far greater returns because they are able to take slightly larger risks than smaller companies the same goes for the fact that united illuminating wouldn’t show a a larger rate of return than the states. Which by the way has kept up to or exceeded those rates of return for years and years included in those years were plenty of down years for the stock market. That’s why it’s an average. One that’s been exceeded for the last few years. So yeah your deception is not appreciated. Annoying but not appreciated.

posted by: joemanc | September 3, 2014  3:41pm

“Fact is smaller companies like united illuminating”

UI is part of UIL Holdings, a $5 billion company…that’s not small!

If I’m following your logic that the market has been exceeding expected rates of return, then all pension funds should be fully funded, right?

posted by: rpk31 | September 3, 2014  5:06pm

@CT Jim yup I’m the one whose being misleading. Here’s another article, addressing the one specific company you brought up, Ford. Here’s the relevant passage:

“The discount rate, which is based on corporate bond yields and is used to determine the present value of payments they make over the life of their plans, has risen this year to 4.74 percent in June from 3.96 percent in December, according to Milliman.

By the end of 2013, the discount rate could be as high as 5.04 percent, and by the end of 2014 it could be up to 5.64 percent, Milliman estimates.”

And your point about a government having more buying power is equally as disingenuous. A government is not a hedge fund, they can’t and don’t use their buying power to chase higher returns in risky assets. They are operating with taxpayer money and need to invest accordingly.

This aside, as I am the deceptive right winger mixing apples and oranges, it should be easy to give one hard piece of evidence of how woefully misguided my interpretation of direct quotes and company financials is. Please show me the error of my ways.

posted by: CitizenCT | September 3, 2014  5:29pm

RPK, the discount rate and Rate of return are two different assumptions used to calculate pension liability.  Discount rate has nothing to do with stock market returns.  It is the rate used to discount the liability to present value and more closely aligns with the bond market.  The lower the discount rate used is, the higher the unfunded liability will calculate to.

posted by: Joebigjoe | September 3, 2014  7:26pm

RPK, great posts, but unfortunately I read something today about our government which if true should really scare the daylights out of everyone including left, right, center, undecided.

Apparently our Central Bank is now trading the stock market which they are not supposed to do. They are acting like a hedge fund. This is not to be confused with QE. The person that wrote this article is a heck of alot more informed than me and has made some very accurate predictions. He thinks its part of a planned currency reset that world governments have been planning. James Rickards, not the author of what I read, has also been writing about this in books and other places. Our US Central Bank trading stocks and manipulating the stock market to me is criminal.

posted by: DrHunterSThompson | September 3, 2014  10:16pm

we need Perturbed to explain this to us.


posted by: rpk31 | September 3, 2014  11:17pm

@CT Citizen You’re exactly right, the discount rate is most closely aligned with the bond market. Specifically, discount rates have historically been the “risk free rate” which has always been assumed to be the yield on 10-year Treasurys. Ever since the economy crashed in 2007-2008, this rate has fluctuated between about 1.5% and 3.5%. Hence why Ford was using a discount rate in the 3’s and 4’s a couple years ago. This is the rate a responsible pension fund would use as a benchmark, and adjust accordingly as the risk-free rate rises (which is has been doing of late as Treasury yields rise). However, for the state of CT to be using a discount rate near 8% is unfathomable. Adjusting this rate down to a more reasonable 5% would show an incomprehensible unfunded liability which would crush Dan Malloy in election season.

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