If you’re thinking about running for governor, you might want to wait 17 years. That’s because if all goes as planned, the state will have paid off most of its unfunded pension liability by 2032.
Until then the amount the state will need to contribute to its state employee pension fund will continue to climb, reaching more than $2.5 billion per year in 2030.
But despite public outcry over unfunded pension liability, the increasing amount has nothing to do with the current administration.
“Underfunding over decades has gotten us to that point,” Bob Gribbon, assistant director of budget and financial analysis for the state Comptroller, said last week.
He said the unfunded liability built as the state deferred payments and offered early retirement incentives over a 20-year period.
“The unfunded liability builds if you don’t make those payments,” Gribbon said. “You’re losing investment opportunities on money you should have put into the fund so we’re back-loading a 40-year payment schedule.”
The underlying policy question, according to state Comptroller Kevin Lembo, is how much are lawmakers willing to allow funding the pension to push other funding off the table.
He said if past administrations had made all the payments, then the 40-year amortization schedule would look a little bit different.
“Do you continue to sort of buy in, up onto the top of that cliff, knowing that there’s relief at the other end? Or do you find ways to make it more manageable over time?” Lembo said.
The latter will come with accusations that the state is “kicking the can down the road,” he said.
But Lembo estimated at some point soon the state is going to reach a point where it can’t find enough services to cut in order to make the full pension payment.
“Right around 2020, 2022 there’s going to be real difficulty,” Lembo said.
Lembo said there’s a question about whether the state is willing to go out and talk to people already in retirement about foregoing a cost-of-living increase or changing the nature of their benefit and “at what point does that actually occur?”
Democratic Gov. Dannel P. Malloy made changes to state employees’ pensions back in 2011, his first year in office. In January, he will have the opportunity to negotiate salaries and wages with almost all the state employee bargaining units, except for the state police.
A recent report by the Yankee Institute concluded that state employee wages are slightly below those in the private sector, but that the average benefits are richer. However, those benefits don’t apply to new state employees hired since 2011.
Recent pension reforms have reduced the cost of new employees’ pensions to between 6.3 and 2.5 percent of salary, Gribbon said. That’s the cost the state has to contribute in one year to cover benefits for one year of service for that new state employee.
The Yankee Institute study used an average of about 17 percent for both pension and health benefits of state employees in its analysis, which concluded that benefits are richer for Connecticut state employees than their counterparts in similar jobs in the private sector.
In addition to renegotiating pension and health benefits back in 2011, the Malloy administration increased its contribution to the state employees retirement system.
“In 2012, we entered into an agreement with the State Employee Bargaining Agent Coalition (SEBAC) to eliminate two actuarial methods that had been adopted through concession bargaining during the Rowland administration,” Office of Policy and Management Secretary Ben Barnes said. “These methods changed the way we amortized unfunded pension liability, pushing the payments into the future and providing immediate budget relief at the time, but at the expense of vastly increased overall contributions. Elimination of these provisions resulted in increased contributions of about $100 million per year now but will reduce the likelihood of devastating balloon payments in the late 2020s.”
The state will have to pay more than $1.5 billion into the pension fund this year to meet the annually required contribution, of which $1.2 billion represents unfunded liability or an amortization payment toward past unfunded liability.
An estimated 82 percent of that payment represents the payment for unfunded liabilities. The normal annual cost of pension benefits is less than $300 million.
In January 2016, Malloy will have an opportunity to sit down with most of the state employee unions to negotiate their salaries and wages, but health and pension benefits don’t have to be negotiated until 2022.