More on the issues underling Connecticut’s State Employee Pension System

Here is the problem:  Connecticut’s State Employee Pension fund is significantly underfunded. 

 

Back in 2000 Connecticut had put enough money aside to meet more than 63% of its state pension obligations. 

 

However, repeated decisions by Governors Rowland and Rell with help and support from the Connecticut General Assembly and SEBAC (the state employee bargaining coalition) not to make necessary pension payments or reduce the level of pension payments that were made (along with early retirement incentives that pushed more people into the pension fund) reduced Connecticut’s funded pension ratio down to 44%.

 

Today, the State’s unfunded pension obligation is over $11.7 billion. (Or roughly a debt equal to $3,333 for every Connecticut resident).  Connecticut owes that money.  It will have to pay that money and it has not put aside the funds necessary to make those payments.

 

Connecticut’s system is one of them of the most underfunded systems in the nation. 

 

Despite this situation, much of what we hear about Connecticut’s state employee retirement system is so laced with partisan rhetoric and false statements that makes it almost impossible to have a meaningful debate about the problem and it’s vital that the state engage in an honest discussion about the pension system and its problems based on the facts and not the hype…

The real facts are these.

Connecticut has 57,825 state employees enrolled in the state’s employee retirement system.  Within that system are four separate pension program.  The old Tier 1 state employee pension program, which was closed to new enrollees in 1984.  Next the state adopted the Tier 2 program that began in 1985 and was then replaced by the revised Tier 2A program.  Finally, the Alternative Retirement Program provides a retirement system for faculty and selected staff at Connecticut’s public colleges and universities.  Instead of a pension these state employees receive what is in essence a 401(k) contribution that they can then take with them as their careers take them to other universities around the country.  Members of the Alternative Retirement Program do not receive a Connecticut state pension.

Of Connecticut’s active employees, the distribution of retirement plans is as follows;

 

Tier 1       4,569

Tier 2     19,298

Tier 2A   26,345

ARP         9,613 

 

Meanwhile there are 48,127 state retirees that receive some sort of pension and/or health benefits that they earned by fulfilling their legal requirements when they served as active state employees.  The following breakdown lists retirees by the retirement program the participate in;

 

Tier 1      29,888

Tier 2     10,986

Tier 2A       862 

ARP            391

 

As I reported in an earlier blog post, it is fair to say that the old Tier 1 pension program was pretty generous.  It is also vital to understand that of the 34,457 people participating in the Tier 1 system, 87% of them have already retired.  Only 13% or 4,569 active state employees remain in the Tier 1 system.

The average annual pension for Tier 1 employees is $34,917. 

However, since the benefit is calculated on the total number of years worked multiplied by the employees’ highest three years of income, some employees have managed to acquire large pensions either because they actually had high salaries or they used over-time to push up their salaries prior to retiring.  There are a total of 1,780 retirees with state pensions of $75,000 or more and 365 enjoy pensions of over $100,000.

Of the total 30, 284 people who are in the Tier 2 retirement program, 64% have retired and 36% remain in active service.   The average annual pension for Tier 2 retirees is $21,335.  The way Tier 2 pension is calculated it is more difficult for artificially pushes up one’s pension.  As result, there are 76 Tier 2 retirees with pensions of $75,000 or more and 15 with pensions of over $100,000.

The Tier 2A, the present retirement program for new state employees includes an even more limited pension program.  As of now, only 3% of the 27,207 Tier 2A employees have retired and the annual pension for these 862 individuals is only $11,289.  Of the Tier 2A retires one has a pension of over $75,000 and none have a pension of 100,000.

The bottom line is that new state employees and the vast majority of present state employees will not be receiving so-called “excessive” pensions when they retire. 

And while the state may want to explore creating yet another – Tier 3 – pension category, the real issue facing Connecticut IS NOT “reforming” the level of pension benefits for incoming state employees but how to deal with the obligation the state created under its older and now closed pension categories.

On a related front, there are some who want to explore the possibility of Connecticut reneging on its legal obligations by retroactively changing pension benefits or somehow defaulting on future payments. 

However, it is highly unlikely that the federal courts would allow a state to do that. Legal rulings to date are pretty clear.  While a private company can use bankruptcy to modify or avoid debts, states, with their taxing powers, do not have the ability to do that. (Although some states like California are or may seek ways to put that question to the test). 

Putting aside the moral question, the reality is that Connecticut will not be able to modify pension levels for those who have already retired and so we return to the fundamental problem of the fact that Connecticut obligated itself to future pension payments and then failed to set aside the funds to meet those obligations.

Furthermore, even if the state and unions could agree on legally allowable changes for present employees (and that is something the new Governor and the bargaining process can definitely explore) the bulk of the future obligations for retirees and future retirees are already in place. 

The failure of Connecticut state government to put aside the necessary funds simply can’t be undone.  The pennywise and pound foolish decisions of our elected officials have come to haunt us and separate of any discussions on “reforming the system”, the State must act by dramatically ramping up the level of funds it sets aside for obligations that are and will continue to come due.

When it comes to blame, there is certainly enough blame to go around but the burden now rests on Governor Malloy and the Connecticut General Assembly to respond to those mistakes and set things right.

  • Joe FitzPatrick, Jr.

    State pensions have to be adjusted. No state employee should collect a pension unless they have at least 25 years of service and are at least 60 years old. That is what is straining us.

    • jonpelto

      Makes sense to me – Hopefully the Malloy people are checking out the comments here

      • lloyd

        Its hard to believe that Malloy and his people are checking much of anything,this state needs to get its financial house in order

  • Areader

    This is terrific info.

    It would be interesting to know the expected (actuarial) annual obligation for each pension tier and how much is funded and unfunded.

    The unfunded pension runoff schedule should be indicative of the impact these pensions obligations would have on future budgets and an indicator as to the level of financial concern.

    • jonpelto

      Areader, i agree – I think that information is available – I’ll look around.

  • Wilton Businessman

    OK, that’s the problem. What’s the solution? Either something else has got to get cut in order for the funding to be there or taxes have to go up to pay the State Employees off. Which one is it?

    • jonpelto

      Wilton Businessman – I guess my point was that the “horse is out of the barn” on the pension side because the real costs are associated with Tier 1 employees – and nearly 90% of them have retired and I personally don’t believe that the state can retroactively go back on what is in essence a contract. That said, minor changes can be made moving forward – like the one proposed by another reader. So to your point – yes taxes will have to go up to fulfill the obligation that was made and can now not be broken.

      But at the same time i do think signficant changes could be made to the other major state employee benefit and that is the healthcare piece, Again, I don’t believe changes can be made to those who have already retired – certainly not without court action – but the state can negotiate changes for present and future employees and retirees going forward.

      I’m sure many people would want a different answer – but that is exactly my point – I don’t believe there is a different answer and coming to grips with the reality of the situation and the problems associated with past decisions is the only way to move forward,.

  • Tom

    If a current State employee was hired under the Tier 1 retirement system and can retire at 55 years old then that should not be changed under any circumstances. Why? Well let me give you an example. Let’s say someone worked for 34 years and was getting ready to retire next year when they reach 55 years of age. Then the Government and Unions agree to change that to 60. You have just deprived our fictional person who was getting ready to retire next year of 34 years of planning. Had that person known 34 years ago that at the last minute they would in fact “not” be able to retire at 55 as they were so promised and had to wait an additional 5 years….yet….they had planned all along to retire at 55…..well……they most likely would have made 34 years of different investments and other personal financial moves in order to “truly” retire at 55.

    Can you imagine someone who worked, for example, with geriatric mental patients for 34 years being told weeks before they are set to retire at 55, “sorry, you can’t retire for another 5 years.

    It’s the equivalent of a 34 year lie. The 29,888 Tier 1 employees who are already retired did so under the terms of the retirement contract they were hired under. Yet…..the current 4,569 Tier 1 employees who were hired under the exact same agreement as those retired Tier 1 employees will have the rug pulled out from under them at the last minute. How is a 34 year lie fair?

    The State of Connecticut should not be able to punish a select group of people in this fashion.

    • jonpelto

      so right

    • Axel

      Couldn’t have said it better myself,Tom. I fall right in that category. I have 34 going on 35 years,but at 53 years of age, I would hate to have the rug pulled out from under me. The state has to swallow their pride on this one. They screwed up when they switched from tier1 contribution plan to tier2 no contribution plan. They could have tweaked the plan to make it more feasible. The Rowland and rell years didn’t help with the deferments. I have no problem working til I’m 60 but not with all the changes in my paycheck every year. Bite the bullet and move on.