Comparison of 2022 pension investments Credit: Yale School of Management

A report from the Yale School of Management reveals that Connecticut’s state employee pension funds have been among the worst performing in the nation over the past decade. The mismanagement of $40 billion in fund assets has compounded the state’s already burdened unfunded pension liabilities, one of the highest per capita in the country.

That’s despite recent cash infusions from Gov. Ned Lamont totaling $5.8 billion. The pension woes, which have plagued several administrations, have been 30 years in the making. 

As of June 30, 2022 Connecticut has the second worst performance of any state in the nation on a three-year and five-year annualized basis and the fifth worst on a 10 year basis. 

The report points to “unusual asset allocation decisions and poor external investment manager selection” as the primary factors behind the pension funds’ underperformance. Yale senior associate dean Jeffrey Sonnenfeld and Steven Tian, CEO of the Yale-affiliated Leadership Institute, argue that if Connecticut’s investments had yielded median returns for all 50 states, the state would have accrued an additional $27 billion over the last decade. This would be nearly enough to fully fund Connecticut’s pension obligations and significantly reduce taxes.

The report found that not only has “Connecticut made mistakes in asset allocation, its track record in external investment manager selection is checkered at best,” and those external managers are “underperforming benchmarks and peer states.”

In an effort to address these issues, Sonnenfeld and Tian put forth five reform recommendations in an editorial this month: careful and accountable asset manager selection, revising the asset mix, considering a shift to more low-cost index funds, increasing performance transparency, and enhancing talent recruitment for the treasurer’s team. The two authors credited current leadership, including state Treasurer Erick Russell and the Connecticut Investment Advisory Committee, for beginning to implement some of these changes.

“I appreciate this report and its effect in elevating the critical ways that investment performance relates to the state’s overall fiscal health, and the everyday lives of Connecticut taxpayers,” Russell said.

He said he’s already undertaking some of those recommendations.

“It’s been a priority of mine to strengthen our investment team and build a foundation for sustained, long-term success. I’ve introduced a bill, currently working its way through the legislature, that will improve our recruitment and retainment efforts and enable the wealth of investment talent we have here in Connecticut to serve on the Investment Advisory Council. Additionally, a nearly complete search for a deputy CIO has seen well over 100 highly qualified national applicants,” he added.

The reforms Connecticut has made to make sure any additional surplus funds are deposited to into the pension fund was a step in the right direction.

“Overall, our pension funds will continue to benefit greatly from the successful statewide financial reforms in recent years,” Russell said. “State government is united in its commitment to adequately fund the pension system and combat the liabilities that have plagued Connecticut for a generation. Generating strong investment returns will be a key component in that process.”

Chris DiPentima, president and CEO of the Connecticut Business & Industry Association, called the proposed reforms “thoughtful, viable recommendations” that deserve immediate attention, adding that “Connecticut’s taxpayers deserve better.”