Joshua Rauh, an associate professor of finance at Northwestern University’s Kellogg School of Management, concluded in a recent report that Connecticut‘s pension fund could be insolvent by 2019. The conclusion has state union officials crying foul.
“Your facts are wrong, your assumptions are invalid, and your recommendations are unhelpful. Other than that, great report,” union officials said in a press release last week.
Rauh’s report, which generated headlines in major newspapers across the country, found that Connecticut is one of seven states which will run out of money for its retirees by 2020. He suggested the trend could be off-set if the state goes from a defined benefit plan, which promises workers a specific annual amount, to a defined contribution plan, such as a 401K type plan. But it’s not just the unions complaining about Rauh’s report. The National Association of State Retirement Administrators, whose members are directors of statewide public retirement systems, have also released a two-page executive summary deconstructing most of Rauh’s conclusions.
Sal Luciano, executive director of AFSCME Council 4 and a member of Gov. M. Jodi Rell’s Post Employment Benefits Commission, said Tuesday that an actuarial analysis of the state’s pension fund by Cavanaugh MacDonald Consulting of Kennesaw, Ga shows the fund will be fully solvent by 2040. The report also found that the pension fund’s assets will increase by more than 45 percent over the next 10 years.
He said the Tier 1 employees hired before 1984 is where the unfunded pension liability lies and as they die the pension liability becomes negligible.
Employees hired after 1984 and then again after 1997 have fewer pension benefits and are contributing a portion of their salaries to the pension account.
“For 40 years it was pay-as-you go,” Luciano said.
He said if the Rell administration was so worried about pension fund then it shouldn’t have offered a retirement incentive program to help plug a hole in the 2010 budget. In April as state budget negotiations were winding down, the State Employees Bargaining Agent Coalition rejected Rell’s call for another program in the wake of the 2009 early retirement program.
At an April 28 meeting the union’s asked Rell’s administration for numbers regarding the pension liability for the 2009 retirees and estimates on how this early retirement package would impact the state’s workforce.
“It suggests they never had an any intent in reaching an agreement with us,” Daniel Livingston, the union’s chief negotiator, said after Rell’s negotiating team walked away from the table.
“The Governor is extremely disappointed that SEBAC – the coalition of state employee unions –tonight summarily rejected any consideration of an early retirement plan to save $65 million in state budget costs,” Rell’s office said in a statement following the meeting in April.
During this time the Rell’s Post Employment Benefits Commission, which was formed in February to look at the unfunded pension liabilities and other post retirement benefits, such as retiree health insurance, wasn’t even meeting, Luciano said.
Michael Cicchetti, deputy secretary of the Office of Policy and Management and chairman of the Post Employment Benefits Commission, said the report from Cavanaugh shows the state will fall $86 million short in funding its 2011 pension liabilities. But even more worrisome is how woefully short it is in funding the other post retirement benefits.
“Aside from this report, our research shows that post retirement benefits will continue to take up a larger and larger portion of the state budget if nothing is changed,” Cicchetti said Monday. “This will mean less dollars for other critical areas as more and more dollars are spent on retired state employees.”
“Lawmakers should be worried,” Cicchetti said.
Cicchetti said he is proposing major changes to the pension systems, which would have the state go from a defined benefit to a defined contribution plan and ending the state’s liability at some point. Other measures the state should consider is ending the practice of spiking where employees are allowed to boost their salaries with overtime during their last three years on the job, he said.
According to Cavanaugh’s actuarial report the plan holds just under $10 billion in assets, and about $19.2 billion in obligations, which is about 52 percent of its liability.
University of Connecticut Economics Professor Fred Carstensen said Tuesday that he’s uncomfortable with the definitive point estimates in Rauh’s report which claim the state pension fund will be insolvent by 2019.
“I much prefer to see a range,” Carstensen said.
He said he’s been told the pension fund for more recent state employees is actuarially sound and it’s the “very generous” benefits given to the older retirees, which is dragging the current system down. Instead of debating a defined benefit verses a defined contribution plan—which seems like a losing battle—he said the state should be looking at how pensions are calculated.
“We have a really serious problem with the way benefits are calculated,” Carstensen said Tuesday. “They get to use overtime in their retirement base pay and ramp it up the last three years.”
“That needs to be taken out of the system,” Carstensen said. “It’s a loophole the state created and people exploited.”
On the other hand, Carstensen doesn’t believe the state employee unions truly appreciate the economic development challenges the state faces.
“If we fail to address the economic development issue, we won’t have the tax base to support public services—or perhaps current pension commitments,” Carstensen said.
“We’re a wealthy state going in the wrong direction.”
Unfunded pension liabilities have become a hot button issue for states like Connecticut as the economy has declined because the more money the state has to spend to meet its pension obligations, the less money there will be for state services.