Pension Reform

State Budget Solutions Responds to Connecticut Office of Policy and Management

On September 25, State Budget Solutions received an e-mail from the Connecticut Office of Policy and Management regarding steps taken to reduce the state’s unfunded pension liability, as it was highlighted in “Promises Made, Promises Broken — The Betrayal of Pensioners and Taxpayers.” The message below was recently sent in response, followed by the original correspondence received.

Mr. Casa,

State Budget Solutions’ (SBS) recent report, “Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers,” reveals the tremendous threat that current public pension funding levels pose to employee retirement security. Our report finds that state-administered plans have an unfunded liability of $4.1 trillion. In other words, states have only enough money to pay just 39 percent of the retirement benefits already earned by hardworking public servants.

Worse, Connecticut’s state-administered plans combined are just 25 percent funded with a $76.8 billion unfunded liability. It would take, today, $21,378 from every man, woman, and child in the state just to fund the promises already made.

While the Governor’s efforts to address this problem are welcome, they are not nearly enough to allay the fears of the fireman approaching retirement after a long career, left up at night to worry that one day his earned benefit will be slashed not by any fault of his own, but because the state had too often played politics with his family’s retirement security. Nor can the state guarantee the newly hired teacher that she is not simply paying into a plan from which she will eventually draw nothing.

Underfunding stems partly from years of skipped contributions into the pension systems themselves. This is as direct of a betrayal of public employee retirement security as can be imagined, and the Governor is right to commit to fully meeting those required contributions. But those contributions will only be enough in the event that investment returns meet the 8-8.5 percent assumptions used by the state.

State funds earned strong returns over the last fiscal year. Yet over ten years, according to the Office of the State Treasurer, the funds earned returns of just 7.22 percent. Over five, they earned just 5.28 percent.

State Budget Solutions calculated liabilities based on a risk-free rate of roughly 3.2 percent that protects retirement security AND the taxpayer. Financial economists agree that this is the only way to guarantee absolute retirement security in the future under the current defined benefit model. This explains why, while the plans would be 50 percent funded under the state’s own assumptions, State Budget Solutions found them to be just 25 percent funded.

Finally, that most of the state’s liability is already earned does not prevent the Governor from further addressing the crisis. The state could immediately “stop the bleeding” by closing the old defined benefit pension systems to new members. Combined with an aggressive funding schedule, the state could work to truly eliminate its unfunded liability.

Connecticut could then offer employees true control over their own retirement security through a defined contribution style system. The state would contribute a set amount into individual retirement accounts that employees would invest in a range of state-approved options, in concert with the expert advice of state financial advisors. Employees would not only be the owners of their own retirement, they would be able to more directly hold the state accountable if politicians ever again decided they could simply skip the state’s share of the contribution. Consistent costs year in and year out would protect funding for all of the other state priorities that help keep Connecticut communities safe and strong.

Keeping retirement promises already made and ensuring that Connecticut can continue to attract first-class public employees in the future are goals shared by all. Unfortunately, the current funded levels of the state’s defined benefit pension plans threaten to undermine both.

Sincerely,

Cory Eucalitto
Editor, State Budget Solutions


The message below was originally received by State Budget Solutions on September 25, 2013.

Dear Sir or Madam:

This is in response to your recently published “”Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers”.

Since Governor Malloy took office in 2011 Connecticut has taken significant steps to tackle the long-standing problems with our growing pension liability.

The state entered into two agreements with the state employee unions’ collective bargaining coalition that restructured pension benefits for new hires, made changes in health care benefits for current employees and increased the State’s annual contributions to the retirement system.

It has been estimated that the first two changes would save Connecticut $20 billion over the next two decades.

Importantly, the Malloy administration also negotiated a change in the schedule of annual required contributions.  Under an agreement entered into by former Governor Rowland, deferred contributions meant the State faced an increase in the year 2030 that would almost double state payments. That spike has been eliminated by the increases initiated by Governor Malloy. We’ve increased our retirement contributions by hundreds of millions of dollars – but over time this change will save the state billions of dollars (as much as $6 billion) and allow increased contributions now to compound over time, further reducing required taxpayer contributions.

It is important to keep in mind that as much as 76% of Connecticut’s pension liability is already earned – a sitting Governor can only deal with a portion of that liability.  Governor Malloy has done that, and we ask that your article reflect those efforts.

Please take a look at this article that discusses the work we’ve done:

http://www.ctmirror.com/story/2013/07/23/states-cash-starved-pension-funds-get-boost-wall-street

Thank you.

Gian-Carl Casa
Undersecretary for Legislative Affairs
Office of Policy and Management
State of Connecticut


In Depth: Pension Reform

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