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OP-ED: Retiring The Decades-Old Practice of Unfunded Liabilities

by | Sep 12, 2010 4:30am () Comments | Commenting has expired | Share
Posted to: Opinion

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.

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(7) Archived Comments

posted by: billhosley | September 12, 2010  11:03am

The “Post-Employment Benefits Commission” is another status quotarian - half measure that doesn’t address the reality of this situation or the fixes needed to make CT govt sustainable at a level that doesn’t cripple growth and the viability of the private sector. Pension reform of the sort NJ Gov Chris Christie and CA’s Arnold S are talking about can’t happen fast enough here. It’s a toxic dynamic where public and private sectors live in alternative universes - with the more privileged and protected class living off the toil of those less priviledged. That’s not gov of the people and for the people, but gov. of govt employees for govt employees. Until we fix it, bet on no growth and 101 services and responsibilities being cut.

posted by: hawkeye | September 12, 2010  3:10pm

Unfunded liabilities will increase. if voters match up a fiscally incompetent, Democrat Dan Malloy, with our multi-billion dollar, deficit spending, Democratic General Assembly.

  Unless state voters elect James Foley, as Governor, “we will have the blind, leading the blind,” with no leadership, in the State of Connecticut, to tackle our massive deficit, and control spending!

posted by: wtfdnucsailor | September 12, 2010  10:35pm

“James” Foley - Hawkeye, I hope that was a slip of the hand. Actually, Malloy is the best candidate to negotiate with the unions since he has had great experience negotiating with municipal employee unions and has stated that he is willing to listen to the employee’s ideas in improving productivity during the negotiations.  I realize that sometime unions do come up with “strange” ideas but often there are good ideas that will improve state government and save tax payer money.  Starting negotiations with threats and ultimatums will lead to unsuccessful and/or stalled negotiations.  It took the state years to get into this mess so the fix will not be easy.  State employees and their union’s cooperation is vital if the next governor and legislature are to succeed in solving the budget deficit and other state productivity problems.

posted by: hawkeye | September 13, 2010  10:44am


You are sailing, in rough seas, when you say, that Dan Malloy, a Democrat, is the best candidate, to negotiate with the unions, when the State Democratic General Assembly, is greatly responsible for concessions to unions, which have helped result, in our massive, $4 billion dollar deficit.

You sound like a Barack Obama Socialist agenda writer, who dismisses the fact that the Democratic Presidential and Congressional majority favoring. given to unions, resulted in Unions,now controlling 60% stock in General Motors ownership.

Dan Malloy, is a taker of state taxpayor money, to the tune of over $7. million dollars, when he knows the State is, in its biggest financial hole, in history.

Dan Malloy, is the last person, that should be negotiating with the unions!

posted by: Opining Quill | September 13, 2010  1:56pm

Thank you Governor Rell for taking the first steps on a road to fiscal sanity.  Now is the time for ALL candidates to step forward and show where they stand on these recommendation.  There can be no equivocation, no pandering to special interest.  If Mr. Malloy and Mr. Foley want to lead let it start here by leading all candidates in adopting these recommendations as part of their campaign position.  I ask each campaign to post a yes or no response to the acceptance of these recommendations.  My guess it they will ignore this or equivocate in an effort to hide from the truth.  I would hope they would both prove me wrong and accept the challenge to adopt the Post-Employment Benefits Commission’s recommendations.

posted by: belltor | September 13, 2010  4:05pm

State of Connecticut created the problem by not funding the pension.
What’s the big surprise here???
If you don’t set the monies aside as scheduled then you will have a problem.
The liability is with the Tier 1 pension recipients.
State and union reformed the pension system back in 1984 with the creation of Tier 2. It is the least generous state employee pension in all of New England.  If you don’t believe it check out study conducted by New England Center for Public Policy.  Report was issued in June of 2010 and study was conducted for Federal Reserve Bank of Boston. Ct. state employee pensions finished dead last compared to other New England states.

posted by: Dave from News Talk Tonight | September 13, 2010  4:16pm

It is interesting to see the posts here.  It is long over-due that the State takes a responsible approach to the debts that it owes, and I would be interested to see WHAT the recommendations of the Commission will be.  I hope that we would see such recommendations sooner, rather than later.  Unlike Opining Quill, I would wait for the Commission recommendations before holding the candidates feet to the fire.  I would call the Governor’s recommendations a good start, but not the final word on the matter.  As for whether Foley or Malloy would be better in following through with such recommendations, I will NOT adopt the partisan approach espoused by Hawkeye.  By stating that Malloy’s engagement in the Fair elections program (where he received $6 Million, not $7 Million) disqualifies him form being able to effectively deal with the state’s fiscal woes is a bit disingenous.  By implication, Hawkeye is saying that Tom Foley is better qualified because he can fund his own campaign.  Is Mr. Foley better suited to negotiate with the State Unions because he has no experience doing so?  Malloy, at least, has had the experience of dealing with unions on the municipal level.  I’m not saying that Malloy is better qualified, or that Foley is lacking in qualifications, but to blindly assert that one is better than the other in dealing with a mess that was created by members of BOTH parties (I wold include Rowland, the current Governor, as well as the legislative leaders from both parties as being authors of the current financial mess) does a disservice to this debate.

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