State Comptroller Kevin Lembo sent a letter to Gov. Dannel P. Malloy Tuesday offering a more cautious and traditional alternative to the governor’s plan to change the state employees pension system.
Lembo said Malloy’s plan, which is based on recommendations from the Center for Retirement Research at Boston College, raises too many unanswered questions.
Malloy’s administration countered Tuesday that Lembo’s proposal is just a list of more unanswered questions about the state’s broken pension funding system.
“We put forward a vetted report with 67 pages of research, data, and details,” Gian-Carl Casa, undersecretary for legislative affairs at the Office of Policy and Management, said. “The comptroller has issued a press release that raises more questions than it answers.”
The most radical portion of Malloy’s plan would separate Tier I — which accounts for $11 billion of the $15 billion in unfunded liabilities — from the 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.
Lembo said separating Tier I retirees from the State Employee’s Retirement System has some “significant strengths, because it creates more manageable and predictable costs over the long-term and establishes a well-funded system for non-Tier 1 employees.”
However, Lembo said the proposal raises important questions, including:
• What is the impact on federal and other fund fringe benefit recoveries?
• How will credit markets react to splitting Tier 1 members into a pay-as-you-go plan?
• Are there legal constraints on the method of separating the assets between the two groups?
• Will there be an impact on the pre-tax status of Tier 1 member pension contributions?
• What is the long-term cost to the state in foregone investment returns as a result of abandoning a prefunded strategy for Tier 1 employees and retirees?
Separating the Tier I retirees and 2,000 employees from the rest of the state employees has never been done before. Connecticut would be the first state in the nation to attempt it.
“More traditional adjustments to our pension funding system have the potential to achieve the same goals without creating the uncertainty inherent in the unorthodox approach of moving a portion of retirees to a pay-as-you-go plan or moving to an open amortization schedule,” Lembo said.
The Malloy administration is still working on answers to many of these questions, and admitted last week during a briefing by the Boston College consultants who put together the recommendation that unanswered questions remain.
Malloy has also recommended extending the amortization period another 15 years, but it would be an open or rolling time frame.
Lembo cited the Government Finance Officers Association, which warned against such a move.
“If we are not cautious, the use of an open amortization period could put the pension plans back on the same unsustainable funding path that we have experienced over the past two decades,” Lembo said.
Lembo recommended extending the current amortization period, lowering investment return assumptions, and changing the methodology for amortizing gains and losses based on variations between actual and assumed experience.
Malloy’s plan, like Lembo’s, also recommends lowering investment return assumptions.
They might disagree slightly about how to get there, but there’s agreement between the two that something needs to be done.
“I am in full agreement with your assessment of the problem and the need for action. I propose we engage the plans’ actuaries to investigate the potential for a traditional solution to our current funding problems,” Lembo said.