HARTFORD, CT — Outgoing State Treasurer Denise Nappier told a commission that the state should use Connecticut Lottery revenues and other state assets to ensure its contribution to the Teachers’ Retirement Fund.
There’s no other solution, according to Nappier.
“I can assure you that there is no investment portfolio composition that would generate investment returns that would allow us to earn our way out of this unfunded liability,” Nappier said.
Nappier told the Pension Stability Commission Friday that if the state issued lottery-backed revenue bonds sufficient to generate cash proceeds of approximately $1.5 billion for deposit into the Teachers’ Retirement Fund, and it transferred an additional $1.5 billion of state assets that can then be developed and appreciate in value — then it would start heading in the right direction.
“The proposal I offer today is designed to put the Teachers’ Retirement Fund back on firm fiscal footing, and represents a concrete, tangible plan that would strengthen the long-term sustainability of the TRF while providing relief to the State and avoiding a potential spike,” Nappier said.
The annual contribution to the Teachers’ Retirement System is about $1.3 billion, but it could top $3.25 billion to $6.2 billion by 2032, depending on different experts, because of years of underfunding. Connecticut didn’t start setting aside money to pay for teachers’ retirements until around 1982.
The pension fund, according to the last valuation has enough assets to cover 57.7 percent of its long-term obligations.
Another complication is that in 2008 Connecticut borrowed $2 billion to shore up the fund. The bond is expected to be paid off by 2033. When that borrowing was approved, Connecticut pledged in a bond covenant to contribute the annual payment to the fund for 25 years.
Only in extreme circumstances would Connecticut be allowed to skip the payment.
Contributing the Connecticut Lottery and other state assets would slowly lower the annual amount the state is required to contribute and free up a similar amount of money in the state budget, according to Nappier. Then it could move toward a more realistic long-term investment return assumption of 7.5 percent. It’s currently 8 percent.
That would give the state enough breathing room to pay off the pension obligation bonds it took out in 2008 early, finishing them off by fiscal year 2026, which would remove the restrictions of the covenant and allow the board to further reduce the investment returns from 7.5 percent to 7 percent and modify the amortization schedule for the unfunded portion of the liabilities.
Under Nappier’s plan, Connecticut will be required to contribute $1.42 billion to the Teachers’ Retirement Fund in 2020. That number will escalate to $2 billion by 2025. If the state takes Nappier’s advice, then the payment in 2020 will be about $1.42 billion, and it would only be about $1.78 billion in 2025. Over the next five years the proposal saves the state about $440 million.
The funded ratio of the Teachers’ Retirement Fund is 57.7 percent. Under Nappier’s plan it goes to 68 percent, and that’s if the rate of return stays at 8 percent.
However, Nappier warned that contributing more than the $3 billion to the fund would result in “negative cash flow.”
The Commission on Fiscal Stability and Economic Growth had recommended transferring all the assets of the Connecticut Lottery, or $5 billion, to the Teachers’ Retirement Fund.
Deputy Treasurer Larry Wilson said that while transferring $5 billion in lottery assets to the Teacher’s Retirement may seem like a better option because it would free up more general fund revenue — it would actually reduce the cash flow to the fund.
“The states contribution would go down so less money would be flowing into the Teachers’ Retirement Fund,” Wilson said.
The Teachers’ Retirement Board learned last week that the state’s contribution to the fund this year is $63 million less than what it expected when the state adopted its budget in May.
That’s partly because the fund averaged a 10.76 percent return over the past two years. The average return in the prior two years was under 2 percent.
Nappier said she doesn’t like to comment on those returns because they are “smoothed” over a longer period of time.
The Connecticut Lottery currently contributes about $350 million a year to the general fund and Nappier’s proposal calls for using about one-quarter of those funds to cover the debt service on the Teachers’ Retirement Fund.
Gov.-elect Ned Lamont has said he’s open to using the Connecticut Lottery to shore up the Teachers’ Retirement Fund.
“What I can promise you is I want to put the state Lottery into the teacher’s pension fund,” Lamont told the retired teachers in late October.
He said the lottery revenue will help shore up the pension fund, which is underfunded by about $13 billion.