Opinion: Connecticut’s pension obligations are cause for concern

By Gail Lavielle

State representative (R-Wilton/Norwalk/Westport)

HARTFORD – In the wake of Detroit’s municipal bankruptcy filing in July, CNBC has released a report on the condition of state and municipal pension obligations. The report found that Connecticut’s level of unfunded pension liabilities is one of the highest in the country.

As of its last biennial actuarial evaluation in 2012, Connecticut had $9.7 billion in assets and $23 billion in liabilities in its State Employees’ Retirement System (SERS), meaning that only 42.3 percent of its obligations were funded, and $13.3 billion, or about 58 percent, were unfunded. While an 80 percent funded ratio (20 percent unfunded) is generally considered healthy, Connecticut is one of nine states, according to CNBC, that have a ratio of less than 60 percent, and among those nine, it is near the bottom of the list. Viewed another way, almost 60 percent of Connecticut’s employee pension fund liabilities are unfunded, which is nearly three times the 20 percent level that would be considered healthy.

When new rules imposed by the Government Accounting Standards Board are implemented next year, Connecticut’s funding ratio may deteriorate further. This is because, among other things, the rules require public pension fund managers to adopt more realistic assumptions when estimating future investment returns.

The effect of Connecticut’s unfunded pension liabilities on the state’s bond ratings is certainly cause for concern. In early 2012, Moody’s downgraded its rating for Connecticut from Aa2 to Aa3, citing “Connecticut’s high combined fixed costs for debt service and post employment benefits relative to the state’s budget” and “pension funded ratios that are among the lowest in the country and likely to remain well below average.” This year, Fitch has downgraded its outlook for Connecticut’s bonds from stable to negative, citing “significant pension obligations” as one of the reasons. Lower ratings make borrowing money more expensive for the state and, by extension, for its taxpayers.

It’s also worth noting that the $13.3 billion in unfunded SERS obligations represent only a portion of the state’s unfunded long-term liabilities. Unfunded obligations related to the Teachers’ Retirement Fund and post-employment health and life benefits for both teachers and other state employees total about $25 billion. The state also has outstanding long-term debt of about $19 billion. The total is about $65 billion.

Looking just at SERS, since 2007 Connecticut’s funded ratio has declined from 53.6 percent to 42.3 percent. As the unfunded obligations increase, the annual contributions necessary to cover them by the time they come due increase as well. Finding the money to make those contributions means either generating more revenue or cutting spending in other areas. Residents feel the effects either way. For the current year, the planned contribution to SERS is about $1.27 billion, around 6 percent of the total budget.

Given the state’s level of debt, its heavy borrowing to pay operating expenses, and sluggish economy, it will be difficult to sustain annual contributions at that level or to increase them. Other states that have faced this problem, like Rhode Island and California, have determined that keeping up with or even increasing the contributions isn’t enough and are attempting to slow the growth rate of the obligations themselves in order to reduce their unfunded pension liabilities. Examples of their proposals include raising the minimum retirement age for state employees, moving active employees to hybrid defined benefit/defined contribution systems, suspending cost-of-living adjustments for retirees until funding ratios improve, increasing employees’ share of contributions to the pension fund, and changing the way base salaries are determined for pension payment calculations.

In Connecticut, any changes like these must be negotiated between the governor and state employee union leadership. Although it has not exercised it in recent years, the legislature does have the right – and many of us believe, the obligation – to vote on any negotiated changes. It should do its part to ensure accountability and taxpayer representation. While it’s understandable that state employees may not think such changes are in their best interests, the alternative may well be not receiving what they’ve been promised when they retire. Without a frank, open, and realistic dialogue between the administration and union leaders to explore and select options like these now, state employees risk a disappointing retirement, residents risk further steep tax increases and service cuts, and the state risks further debt rating downgrades and serious threats to its solvency and its economic survival.

State Rep. Gail Lavielle (R-143)

Ranking member of the General Assembly’s Commerce Committee

Member of the Appropriations, Education, and Higher Education Committees


6 responses to “Opinion: Connecticut’s pension obligations are cause for concern”

  1. M. Murray’s

    The question is who failed to fund the pension over the years? Did the unions fail to meet their obligations to pay into the fund? Did the state fail to contribute their obligated amount over the years?

  2. Piberman

    As long as CT voters enthusiastically endorse the tax and spend fiscal policies of Gov Malloy and the Democrat super-majority in our State legislature our fiscal affairs will continue to degrade the standing of a once proud state. Rep. Lavielle has again performed an important public service in calling attention to our unfunded pension obligations. The question is whether any voters are paying attention. Our Democrat state legislators are clearly playing the ostrich.

  3. RU4REEL

    The union members that I know put in their share directly from weekly pay, it is the state and municipalities that at times do not contribute their share, then when the chickens come home to roost, they blame the union members.
    Easy targets.

  4. Lifelong Teacher

    Don’t blame the unions here. Pension contributions are deducted from every one of our paychecks. It is shameful at the state isn’t funding it’s obligation.

    In CT,, teachers do not have the option to participate in Social Security.

  5. RU4REEL

    Neither do police and fire with Social Security.

  6. M Allen

    This is indeed a travesty and one the state will have an almost impossible time trying to dig itself out of. During the big years of stock market growth, many plan sponsors believed there was no need to make appropriate contributions because the plan assets were growing at a rate higher than necessary. Of course, nothing goes up forever and when assets dipped due to the financial crisis and subsequent market declines, it was also a bad time for both companies and municipalities to make contributions. But Connecticut’s plan has been underfunded for years, though multiple administations of both colors. Many have heard the stories of corporate pension plans that go underfunded and what happened to the employees of those companies when the firms go belly up. What they don’t realize is that the level of underfunded pension plans among state and local governments make corporate pensions look like a joke. Connecticut is pretty bad off in this regard, but all of the states and far too many local government plans are in horrible shape and the figures are astounding in scope.

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