State Comptroller Kevin Lembo thinks he’s found a solution to Connecticut’s unfunded pension woes.
Lembo worked with actuaries and pension experts to analyze various reforms to funding the state employee retirement system and he presented his findings Thursday in a report to the governor, state treasurer, and labor unions.
If the state does nothing, the actuarially required amount the state must contribute to the fund will continue to increase to more than $2.5 billion a year leading up to 2032.
The unfunded liability was built as the state deferred payments into the fund and offered early retirement incentives over a 20-year period. Policymakers seem to agree something needs to be done now before pension funding crowds out everything else in the annual $20 billion state budget.
Lembo’s report Thursday offered a solution to that problem.
Lembo found that if the state lowers the assumed rate of return from 8 percent to 7 percent, changes the amortization method, and separates the amortization period based on the date state employees were hired, then it could save more than $1 billion.
“This proposal provides certainty and stability, improves the SERS funding ratio, helps guard against future budgetary challenges, protects the state’s bond rating and maximizes investment earnings,” Lembo said.
Lembo also proposed “layering” the investment gains and losses, so they don’t impact the annually required contribution. Those gains and losses will be spread out over a 15- to 20-year period. Lembo said the layers will start to cancel each other out over time and not drive the required contribution in that “crazy saw tooth pattern.”
Overall, Lembo believes his proposal will take the “volatility and unpredictability” out of the equation.
Lembo said his plan is different than the one Gov. Dannel P. Malloy explored with the Center for Retirement Research at Boston College a few months ago because it doesn’t segregate the state employee tiers into two separate groups.
Under Malloy’s plan, one plan 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.
Connecticut would be the first state to split its retirement system in two, if it decided to go with Malloy’s plan.
Lembo said the current system for funding Tier I employees is the “Model T Ford” of retirement plans. He said leaving state employees in that plan would sort of leave them at the “whim of every legislative session.”
The state employee retirement system is “one program and any attempt to describe it as anything other than one program is inaccurate,” Lembo said. “There are different benefit designs within the state employee retirement system, but it is one system.”
Lembo said his plan is also different than Malloy’s because he used the state actuaries and the experience with the state pension fund to calculate the scenarios.
State Treasurer Denise Nappier applauded Lembo’s efforts.
In a statement, she said Lembo “advances a compelling set of reforms that would maintain an actuarially designed pension system in a manner that minimizes the burdens on taxpayers, now and into the future.”
“We can implement sound reform measures that have, at their core, a disciplined approach to fully funding the state’s annual contribution to the pension fund, while being vigilant in managing the costs of the state’s defined benefit plan,” Nappier added.