Aside from the more than $3 billion budget deficit, the state’s unfunded pension liability may be one of the biggest issues facing Gov. Dannel P. Malloy and the General Assembly as they seek to bring the state back to fiscal stability.
But Connecticut is not alone.
Joshua Franzel, vice president of research for the Center for State and Local Government Excellence, said that “you would think the sky was falling,” but it’s not. He said the Center for Retirement Research at Boston College studied 126 public pension plans and found some plans are doing very well, while a few are struggling.
Click here to download his presentation.
In 2008, the 126 plans researched by the Center for Retirement Research at Boston College were 84 percent funded. In 2009, those same plans were about 78 percent funded, which he said isn’t too bad. About 10 percent of those public pension plans studied are 100 percent funded.
He said the plans doing well are those that have consistently funded their actuarially required annual contribution, and on average the plans are typically assuming investment returns of around 8 percent.
Connecticut’s rate of return on its pension investments was much higher at 14.91 percent for fiscal year 2011. The investment translates into $3.2 billion of growth in assets.
But the University of Connecticut’s Mark Robbins, who said he’s studied the state’s situation, sought to throw some cold water on Franzel’s balanced presentation to legislative staffers Thursday morning.
Robbins, an associate professor of public policy, said the required annual contribution to Connecticut’s pension plan will exceed $1 billion in 2012. Based on his calculations, he said the pension fund is funded at 44.4 percent. Studies in 2010 found that the pension fund was funded at 59.8 percent and 62 percent.
Further, Robbins said two-thirds of the actuarially required contribution to the funds are catch-up contributions, or contributions that should have been made to the fund previously, but weren’t. Over the last two years the unions and the governor have agreed to defer about $300 million in pension payments to the fund.
He said the Teachers’ Retirement Fund is funded at 61 percent and the catch-up contribution in 2012 will need to be $757 million.
“It’s not a surprise we’ve fallen behind because part of it was due to agreements,” Robbins said. Agreements with the State Employees Bargaining Agent Coalition to defer pension payments explain some of the unfunded liabilities, he said.
But Connecticut also has sought creative ways to fund its pension liabilities, such as the $2 billion in bonds it issued in 2008 for the Teachers’ Retirement Fund.
Robbins said rating agencies don’t look favorably upon these types of long-term borrowing to cover pension liabilities, but Christine Shaw from the state Treasurer’s Office, begged to differ.
She said what is unique about Connecticut is a bond covenant that went with those bonds. The covenant requires the state to make the actuarially required contributions. Those bond funds are helping to close a $6.9 billion unfunded liability, and Shaw said the rating agencies look favorably on the covenant.
But teachers and the state employee retirement fund only account for some of the state’s unfunded liabilities.
Robbins said the state’s unfunded Other Pension Employment Benefits, or OPEB, account is unfunded to the tune of $22 billion, which is equivalent to a per capita liability above $6,200.
A November 2009 report by the Center for State and Local Government Excellence found that Connecticut’s unfunded OPEB liability per capita was the third highest in the nation, behind only New Jersey and Hawaii.
A staffer for House Speaker Chris Donovan asked how much of that unfunded liability can be attributed to employees hired after 1984, and Robbins defaulted to Shaw, who said about $8 billion is attributed to those employees while Tier I employees are responsible for about $14 billion.
Tier 1 employees hired before 1984 were asked to contribute two percent of their earnings up to the Social Security wage base, plus five percent of their earnings above that level depending on which group they belonged to under the plan. However, union leadership is quick to remind people that under the most recent pension agreement all new employees contribute 3 percent of their salary to health insurance and all employees with the five years of state service contribute 3 percent until they reach 10 years of service.
Despite the relative health of some pension plans the National Conference of State Legislatures found that in 2010, some 21 states made changes to their plans. And over the past five years, 31 states have made changes to their public pension funds. Connecticut needs to bargain with the State Employees Bargaining Agent Coalition in order to make changes to the fund and benefits. The last change made was in 2009.
“Every state is different,” Franzel said. “There’s no magic wand.”
He said defined benefit plans in the private sector typically don’t require employee contributions, but in the public sector the average contribution for states that participate in Social Security is 5 percent and for states that don’t it’s 8 percent.
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.
Traditionally, the General Assembly has little say in what happens since the pension benefits are negotiated between the governor and the State Employees Bargaining Agent Coalition.
But there is legislation which seeks to have the pension fund take out life insurance policies on state employees so that if an employee dies, the state can collect $50,000 and apply it to unfunded pension liabilities. The life insurance would be purchased with assets from the state pension fund, which concerns Shaw because it’s not clear if it would improve the funds’ investment risk.
The Commerce Committee’s deadline to act on that morbid piece of legislation is next Tuesday. The bill is being supported by Anthony Leonardi, who testified in favor of it this week.
Editor’s note: An earlier version of this story mistakenly reported the testimony in support of the Commerce Committee legislation was submitted by the Insurance Commissioner Thomas Leonardi
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