Once the elections come and go, the most pressing issue facing the new crop of elected officials will be a seemingly intractable $3.3 billion budget deficit for 2012. With some candidates pledging solutions without tax hikes and others making new spending promises, the budget’s Gordian knot seems poised to become a noose that strangles Connecticut’s economic future.
Even if an Alexandrian solution can be found for that challenge, yet another gargantuan task awaits – and it makes the budget deficit seem almost trite by comparison. Connecticut’s state employees’ pension system is dramatically underfunded. According to the Office of Policy and Management, the state’s unfunded liability is $42.6 billion. Some analysts suspect that the figure could be more like $51 billion.
A recent Pew Center on the States study characterized Connecticut’s pension obligations as “meriting serious concern” and a Northwestern University study suggested that the pension system would go broke by 2019.
Worse, these obligations have been exacerbated by recent state actions to balance the budget. Legislators have delayed retirement fund payments of $314.5 million over the past two fiscal years to help close current year budget gaps.
Whereas in the private sector employers have largely moved to 401(k)-style defined contribution retirement plans, the public sector has maintained the defined benefit model that guarantees benefits forever.
The defined benefit model is susceptible to tricks that artificially inflate pensions – like pension “spiking”, in which employees plus up the three years used to calculate their benefits by earning extra compensation. “Double dipping” is another pitfall of defined benefit plans that has been in the news in recent years. Having retired from one state position, some employees go back to work for the state and receive both a salary and their pension benefit. According to the Courant, there are “hundreds” of state employees who are double dipping.
The pension system also is under duress from the early retirement incentives that have been offered in recent years. While politically attractive because it reduces the size of the state employee workforce without layoffs, this strategy simply shifts costs from the current to the future. As noted in the Pew study, Connecticut has had four early retirement incentive programs in the last 20 years, adding thousands of unexpected new retirees.
If the problem seems impossibly large, then it is ironic that the solutions seem helplessly small. The governor’s panel on pension reform considered this week options that would save less than $50 million a year.
In the longer run, the answer to this problem must be a combination of these smaller reforms coupled with a change to a defined contribution plan, like those available in the private sector, to reduce the long-term cost of the pension system. Michigan made this change in 1997 and Alaska in 2006. Other states, such as Indiana, Oregon, Montana, Florida, and Ohio, offer combinations that allow employees to choose between the two models.
Challenges like pension reform, with a scope and scale that is unprecedented, are too easy for state officials to avoid. But Connecticut cannot avoid it. The state is making promises to its employees that, at least at the current time, it is making few plans to keep. It is a very poor way to govern.
Heath W. Fahle is a policy analyst and consultant based in Manchester. His background in political campaigns includes work for former U.S. Rep. Rob Simmons and the Connecticut Republican Party. He also is the principal of Revolutionary Strategies LLC, a website design and consulting firm. Learn more at www.heathwfahle.com.