Good news, garbage, or mixed? Damned if I know, but I'm confident some of you readers will.
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magic kingdom?
CT saving billions in state employee, teacher pension liabilities
Lawmakers on the legislative budget-setting committees on Monday got a raft of good news as they head into next month's new session with a nearly billion-dollar budget surplus and historic investments in the under-funded pension programs for state employees and public school teachers.
During a two-hour presentation-and-question session with members of the Finance Committee and the Appropriations Committee, Gov. Ned Lamont's budget office and the non-partisan Office of Fiscal Analysis agreed that higher-than-expected revenue, which increased by 7 percent in the budget year that ended June 30, is expected to continue.
"The teachers' retirement unfunded liability has been reduced by a billion dollars in the last year," said Jeffrey Beckham, who as secretary of the Office of Policy and Management is Lamont's budget chief who is currently working on a two-year budget proposal that Lamont will submit to the General Assembly in February. "And the Teachers' Retirement System funded ratio has increased from 51 percent to 57 percent." The pension obligations have been reduced by $7 billion in recent years, he said.
The State Employee Retirement System, he said will soon reflect the $3.2-billion investment of surplus revenue required whenever the $3-billion-plus emergency reserves reach their maximum. More than 30 percent of the state budget is long-term debt for capital expenditures totaling $27 billion.
In recent years, major structural changes were made to the pension plans, including re-amortizing the funds' debt over a new 30-year period, and projecting more-realistic investment returns of 6.9 percent, Beckham said. "In the last couple of years we have made enough deposits that have saved $9.4 billion over the next 25 years," Beckham said, noting that last year, there would have only been a $3 billion savings over the next quarter century.
Last spring, the General Assembly approved budget adjustments to the second year of the biennium totaling $22.4 billion. State Sen. Cathy Osten, co-chairwoman of the Appropriations committee said that the overall financial picture is good. Rep. Sean Scanlon, D-Guilford, the co-chairman of the Finance Committee who will leave the legislature to become state comptroller, agreed.
"It's great to see a report like this," Scanlon said. "It's something we should be celebrating." State Sen. Henri Martin of Bristol, a top Republican on the Finance Committee, agreed. "It's very encouraging to see positive numbers," Martin said. Sales and use taxes have increased in double figures.
"The main thing that I hope we take away from this is that we are going in the right direction in many of the things we've done for the last couple of years," said Rep. Toni Walker, D-New Haven, co-chairwoman of the Appropriations Committee.
"Essentially, revenue is growing faster than fixed costs," said Neil Ayers, director of the Office of Fiscal Analysis, expecting an additional $2.8 billion to be invested in the two pension programs. He said that the "budget puzzle" facing the General Assembly while it crafts a new two-year spending package in the spring of 2023, is the projected small $6.7 million surplus in the budget that starts July 1, 2023.
State Sen. Craig Miner of Litchfield, a top Republican on the Appropriations Committee who did not seek reelection, said that in his 22 years in the legislature, this could be the most-positive fiscal report he has seen, crediting the bipartisan state budget of 2017 that established "guardrails" on spending and investments in the emergency reserves and pension plans that Backham said Lamont plans to extend.
Still, state Sen. John Fonfara, D-Hartford, the veteran co-chairman of the Finance Committee, warned that with more than 50 percent of state spending from fixed costs, the state budget still offers challenges to the next legislature, which convenes on January 4. "We don't talk about how to grow the economy that much," Fonfara said.
That all sounds like good news to this financial idiot. On the other hand, I don’t trust politicians or reporters, and the Yankee Institute, which usually offers a skeptical view of Hartford shenanigans, published this article just six months ago:
Connecticut has the worst-funded pension system in the country
The Institute does give some credit to Lamont’s clown show for making some modest reforms, but doesn’t accord those changes the same adulation the reporter in the first article, of course, because this author isn’t a media flack.
Connecticut has the worst-funded pension system in the country, according to a new annual report released by the American Legislative Exchange Council.
Using a “risk free” discount rate – which increases the state’s estimated pension debt – ALEC found that Connecticut only had 23.8 percent of the funds necessary to meet its $111.2 billion in unfunded pension liabilities.
Overall, across all fifty states, unfunded pension liabilities totaled $5.8 trillion, an increase of $900 billion over their previous year’s report, largely due to quickly growing pension debts in states like California, Illinois, Texas and Massachusetts.
Connecticut’s total unfunded pension debt was the 36th highest in the country and 48th on a per capita basis, according to the report.
However, there are several differences between ALEC’s report and what the state of Connecticut reports as its pension debt, largely because of the assumptions made in calculating the unfunded pension liability.
According to Connecticut’s 2020 Comprehensive Annual Financial Report, the state’s unfunded pension liabilities for state employees, teachers and judges sits at roughly $40 billion.
And according to 2020 state reports for Connecticut’s two largest and most unfunded pension systems, the State Employee Retirement System is 35.8 percent funded, while the Teachers Retirement System is 51.3 percent funded.
Those figures, however, assume the state will get 6.9 percent annual return on its pension investments. ALEC, on the other hand, used a risk-free discount rate of 2.34 percent based on the yield of U.S. Treasury bonds, which causes the unfunded liability to rise dramatically.
Connecticut has been making some positive pension changes in recent years, however, lowering its assumed rate of return from 8 percent to 6.9 percent and instituting the volatility cap, which, after fully funding the state’s Rainy Day Fund, allows the state treasurer to pay off some of Connecticut’s pension debt.
Under the latest budget agreement signed by Gov. Ned Lamont, Connecticut will pay roughly $1 billion toward the pension debt. [bolding added]
According to ALEC’s report, Connecticut’s pension funding ratio increased by 9.3 percent, while states like California, Massachusetts, New Jersey, North Carolina and Pennsylvania saw their funding decrease. [And why doesn’t this surprise me? ] : “Vermont’s funding has decreased by 30%”
Under agreements made by both Gov. Dannel Malloy and Lamont, Connecticut extended the payoff dates for Connecticut’s unfunded pension liabilities, pushing the payoff period into the mid-2040s to avoid costs potentially spiking to unsupportable levels, but also adding billions to the debt.
Connecticut also instituted a fourth retirement tier for new employees that incorporates a pension/defined-contribution hybrid plan and limits the amount of overtime that can be applied to pension calculations as part of the 2017 SEBAC Agreement. In exchange, state employees were granted pay raises and layoff protections.
Connecticut’s long-term pension problems have essentially caught the state in a Catch-22 and this year’s payoff may be the last for the foreseeable future.
Connecticut balanced its budget this session with a massive influx of federal COVID-relief funds, helping close a budget deficit, but the next biennium is projected to face a multi-billion dollar deficit as well and may require Connecticut to either raise taxes, implement spending cuts or use its reserve funds to bridge the gap.
The deposits into the Rainy Day Fund are based on the volatility cap, which is tied to investment earnings. Since the imposition of the state income tax, Connecticut has become more and more reliant on the wealthiest taxpayers who receive much of their income from Wall Street investments that are notoriously volatile.
That reliance can mean feast or famine for Connecticut, while the state’s pension payments have made a steady upward migration.
Although pension payments are projected to flatten out over the next several years – provided Connecticut meets its investment returns – a downward shift in the stock market could leave Connecticut’s paying more for its pensions with less revenue.
Connecticut’s pension debt is tied to a myriad of cost issues facing state government. This trickle-down effect has caused funding problems statewide, resulting in higher student tuition for public colleges and universities, the loss of university research grants, and fringe benefit costs that nearly double the price of hiring even a single state employee.
Connecticut’s status as having the most underfunded pension systems in the country is not new. Previous pension studies by ALEC also found Connecticut to be in the worst shape when it comes to pension funding. Although, the numbers have changed year-over-year, the result has remained the same.
In ALEC’s 2017 study, Connecticut’s pension debt was estimated at $127 billion – $16 billion more than their recently-released study – and had a funding ratio of 19 percent.
Wisconsin ranked top in the nation for its pension funding based, in part, over its risk-sharing plan that requires the state to split the annual pension contribution with pension plan participants.
The study authors recommended that struggling states reform their pension systems through implementing defined-contribution plans or risk-sharing plans and to avoid pension investments based environmental, social and governance principles, known as ESG, which are shaped by political leanings.
Pension reforms for Connecticut state employees, however, require approval by the State Employee Bargaining Agent Coalition. Teacher pensions, conversely, are set in state statute and can be changed legislatively, but those changes generally come with a heavy political price-tag.Under agreements made by both Gov. Dannel Malloy and Lamont, Connecticut extended the payoff dates for Connecticut’s unfunded pension liabilities, pushing the payoff period into the mid-2040s to avoid costs potentially spiking to unsupportable levels, but also adding billions to the debt.
Connecticut also instituted a fourth retirement tier for new employees that incorporates a pension/defined-contribution hybrid plan and limits the amount of overtime that can be applied to pension calculations as part of the 2017 SEBAC Agreement. In exchange, state employees were granted pay raises and layoff protections.
Connecticut’s long-term pension problems have essentially caught the state in a Catch-22 and this year’s payoff may be the last for the foreseeable future.
Connecticut balanced its budget this session with a massive influx of federal COVID-relief funds, helping close a budget deficit, but the next biennium is projected to face a multi-billion dollar deficit as well and may require Connecticut to either raise taxes, implement spending cuts or use its reserve funds to bridge the gap.
That reliance can mean feast or famine for Connecticut, while the state’s pension payments have made a steady upward migration.
Although pension payments are projected to flatten out over the next several years – provided Connecticut meets its investment returns – a downward shift in the stock market could leave Connecticut’s paying more for its pensions with less revenue.
Connecticut’s pension debt is tied to a myriad of cost issues facing state government. This trickle-down effect has caused funding problems statewide, resulting in higher student tuition for public colleges and universities, the loss of university research grants, and fringe benefit costs that nearly double the price of hiring even a single state employee.
Connecticut’s status as having the most underfunded pension systems in the country is not new. Previous pension studies by ALEC also found Connecticut to be in the worst shape when it comes to pension funding. Although, the numbers have changed year-over-year, the result has remained the same.
In ALEC’s 2017 study, Connecticut’s pension debt was estimated at $127 billion – $16 billion more than their recently-released study – and had a funding ratio of 19 percent.
Wisconsin ranked top in the nation for its pension funding based, in part, over its risk-sharing plan that requires the state to split the annual pension contribution with pension plan participants.
The study authors recommended that struggling states reform their pension systems through implementing defined-contribution plans or risk-sharing plans and to avoid pension investments based environmental, social and governance principles, known as ESG, which are shaped by political leanings.
Pension reforms for Connecticut state employees, however, require approval by the State Employee Bargaining Agent Coalition. Teacher pensions, conversely, are set in state statute and can be changed legislatively, but those changes generally come with a heavy political price-tag.
So, would any of you financial-savvy readers out there care to comment?
UPDATE: “A READER UP NORTH” has graciously added his thoughts (as well as alerting me to my repeating several paragraphs in what was a horrible cut-and-paste job; thank you, North).
I rate the "news" as mixed. Both sources are painting pictures that lean Pollyanna-ish, or doomsday-ish depending on the authors. The funding level is indeed very low, by private pension standards. So there must be adjustments. And it hits close to home here, in the "Reader Up North" household...
I have profoundly mixed feelings: my wife has been a public school teacher for the past 27 years. All that time, we have contributed 8.6% of her salary to the state's pension scheme, with my wife being forbidden from participating in Social Security. Our "friends" in Hartford have, during this same period, spent much of the money supposedly earmarked for making the pension actuarially sound, on pet projects and to close holes in the state budget. Now, suddenly, it's a "crisis". In my opinion, it's a manufactured crisis. It's a crisis by abdication of duty on the part of the state. It's a contract. Live up to it. We can argue if it's a prudent contract all day long but that does not help the folks trapped in the system.
Would I rather have my wife participate in social security, with a lower contribution rate in the form of FICA taxes? You bet. Do I feel cheated as a high-earner taxpayer who will now have to pay more in order for the dolts in Hartford to "catch up"? You bet. Has my wife also contributed to her 403(b) plan (the nonprofit equivalent of a 401(k)) in order to backstop retirement in the case of a pension default? You bet. Have I saved, in my small company plan, amounts that exceed our expected safe withdrawal rates, in order to further backstop retirement? You bet. Have we postponed retirement, and foregone "fun" cars and vacations, in order to prepare for some future reduction or failure of the pension? Yes indeedy. In our house, it's bootstrap and call bullshit on idealogues in power. So both reports are bullshit- the first being too rosy, and the second obviously biased against the scheme in the first place. The truth, as always is somewhere in between. But there is pain coming, for both retirees and taxpayers both. Count on that.
