Two constitutional officers from the same political party say there are still too many unanswered questions about Democratic Gov. Dannel P. Malloy’s draft proposal to change the pension system for Connecticut state employees and teachers.
State Treasurer Denise Nappier has applauded Malloy’s efforts to stabilize Connecticut’s pension systems, but isn’t certain about the path he’s taking.
“There are a myriad of investment, legal, actuarial and tax issues with which the state must contend,” Nappier said last week. “In addition, any plan must ensure that we honor our commitments to our retirees. That obligation is inviolate.”
State Comptroller Kevin Lembo also questioned Malloy’s proposal, which the governor made for the first time two weeks ago.
Lembo wanted to know more details about the legality of creating two systems for state employees. One would be for the 2,000 active and nearly 30,000 retired state employees in Tier I, which accounts for $11 billion of the $15 billion in unfunded liabilities. The second would be for Tier II and Tier III employees. Tier I employees were hired on or before July 1, 1984. Those hired between July 2, 1984, and June 30, 1997, are covered under what’s called a Tier II benefit plan. Employees hired after 1997 are covered by Tier IIA, and those hired on or after July 1, 2011, are considered Tier III.
“How does this liability shift affect the General Fund and state spending cap?” Lembo has asked. “How does it compromise federal revenue that the State Employees Retirement System receives related to fringe benefit recovery?”
None of those questions or others were answered Tuesday by consultants from the Center for Retirement Research at Boston College or Office of Policy and Management Secretary Ben Barnes.
The consultants from Boston College were hired almost a year ago to come up with a solution to Connecticut’s pension woes. On Tuesday they issued this report, which concluded that if nothing is done, the state will have to double its contribution to the funds from the $2.5 billion it currently pays to about $5 billion as the state approaches 2032.
“This is not about ownership of the solution, it’s about ownership of the problem,” Malloy said Tuesday in his opening remarks to the group.
It’s still unclear what, if any hurdles, the state would have to clear to get the plan approved by the Internal Revenue Service.
Then there’s the state employee unions, which would have to agree to separate the pension system.
“Connecticut would be the first to bifurcate their retirement system,” Alicia Mullen, director of the Center for Retirement Research, said. “I think that’s a sensible thing to do.”
In a letter to Malloy, Barnes stated that there are “significant legal, procedural, financial, and actuarial questions, which will take some time to answer.”
Some of those questions include whether there should be a transition to a split plan and whether the split would impact the state’s credit rating or compliance with Generally Accepted Accounting Principles, to name a few.
In addition to splitting the State Employees’ Retirement System, the Malloy administration is proposing lowering the investment return assumptions from 8 percent to something more in line with what they’ve been. Last week, the Teachers’ Retirement System board lowered its rate assumption from 8.5 percent to 8 percent.
Barnes recommended lowering the investment return rate for the state employees’ plan to 7 percent.
Barnes is also proposing pushing the end date for full funding out past 2032, another 15 years. But it would be a “rolling 15 years,” which means the liabilities wouldn’t be amortized over a closed period of time.
According to Barnes this would eliminate “the risk of contribution spikes in the final years of a fixed schedule.”
Barnes admitted that there are many more questions left to be answered, and they must be answered in collaboration with several entities, including the unions, lawmakers, and retirement commission.
“These recommendations are a combination of common sense measures, actuarial refinements, and bold new thinking,” Barnes wrote to Malloy. “They must be implemented over time, with care and flexibility. They must be implemented in consultation with many constituencies of our pension systems—retirees, employees, teachers, legislators, and taxpayers.”
