Attention Retired and Active State Employees…
The Great Pension Fix of 2012 isn’t the guaranteed fix that everyone thought it was…
One of the most important fiscal issues facing Connecticut and its future is the State’s incredible unfunded pension liability.
Adequate funding will directly impact more than 100,000 Connecticut families, as retired and active state employees, look to the State Employee Retirement Fund (aka the State Employee Pension Fund) to fulfill its legal obligation.
However, despite knowing that the financial obligations were building higher and higher, Connecticut’s public officials failed to invest the necessary funds to pay for the future pensions that it was committing too.
In no other area of Connecticut state government has fiscal policy been so poorly implemented.
Democratic, Republican and Independent governors turned a blind eye to the impending crisis. Legislators were only too happy to go along.
The failure to properly fund the State Employee Pension Fund would mean that future generations would not only be burdened, but crippled, by the massive payments that would be needed to make up for decades of underfunding.
While experts recommend that a “healthy” pension fund should be at least 80% funded, Connecticut’s State Employee Pension Fund ratio stands at 48%, the worst ratio in the nation.
But On January 23, 2012, Governor Dannel Malloy stepped forward with an initiative that would finally address Connecticut’s unfunded pension liability. See Malloy’s Press Release http://www.governor.ct.gov/malloy/cwp/view.asp?A=4010&Q=494876
By increasing pension payments by $3 billion between now and 2025, Connecticut State Government would put the fund on track and save future taxpayers billions and billions of dollars. While the cost of Malloy’s initiative was significant, the benefits were even greater.
According to the press release, “The restructuring will save the state nearly $6 billion over the next 20 years, and put the pension system on the road to long-term sustainability, something that is currently not the case.”
The press release explained that, “starting in FY2014, [Connecticut would] appropriate additional funds, over and above the Annually Required Contribution, in order to achieve 80% funding in FY 2025, and reaching 100% in 2032…”
To allow the extra payments to be made, Malloy’s plan also included amending Connecticut’s state spending cap to exclude pension contributions in excess of the Annually Required Contribution.
The Connecticut Legislature followed Malloy’s directive and this year’s budget includes the first year of Malloy’s plan.
But then just this last week, virtually unnoticed, came the news that Governor Malloy’s pension funding initiative is nothing but a blueprint.
Despite what observers assumed last February, the Malloy initiative didn’t lock the state into properly funding its unfunded liability. While it did remove a negative provision that was adopted during John Rowland’s administration, we now learn that the promised commitment that the state would finally make the appropriate payments over the coming 15 years was nothing more than a suggestion.
In fact, this governor, or any governor, could simply throw out the plan and go back to using the money for something else.
The truth was revealed last week when Malloy and the State Retirement Commission agreed to reduce the assumed annual return on pension fund investments from 8.25 to 8 percent.
They took this move because one of the bond rating agencies, Moody’s Investors Service, a firm that had already lowered Connecticut’s bond rating, recommended that states lower their assumed annual rate of return to reflect the new economic reality. Their recommendation was that states use a number more like the 5.5 percent average return that funds have been getting the last couple of years.
According to the Governor’s budget chief, the cost of moving from 8.25 to 5.5 percent would have been prohibitively expensive, so the state shifted from 8.25 percent to 8 percent.
But the real news was not the drop in the expected rate of return, but, for the first time, it was revealed that while Malloy did increase the state’s contribution to the State Employee Pension Fund by $277 million this year, only $100 million was that amount was “contractually guaranteed.”
The issue certainly appears to be complex, but it boils down to one extraordinarily key issue.
The assumption has been that the Malloy Administration locked the new funding initiative into the SEBAC agreement that he signed with the state employee unions. In that way, this governor and future governors would be required to make the necessary payments into the State Employee Pension Fund. Malloy has said repeatedly that his plan saved future Connecticut taxpayers $6 billion dollars. The implication being that the payments were guaranteed.
However, the Malloy Administration’s answers to reporters this week indicate that they did not lock the payment plan into place, after all.
As noted above, by failing to make it part of the SEBAC agreement, this governor or any governor can simply stop making the extra payments, in which case, Connecticut’s State Employee Pension Fund would remain on a collision course with the future.
At no time did the Governor or the Legislature suggest that this plan was optional. In fact, the whole reason for exempting the payments from the State’s spending cap was to allow the increased funding plan to move forward year after year.
There could be as many as four more governors before Malloy’s pension funding plan ensures that the State Employee Pension Fund reaches the 80 percent ratio.
Despite what was said, we now have a situation in which any one of those governors could destroy the whole effort.
Looking at it now, the situation is eerily similar to what happened with the State’s promised conversion to Generally Accepted Account Principles (GAAP). As a candidate, Dan Malloy promised that he would shift the state to GAAP accounting immediately upon becoming governor. Then, when he and his administration realized the full cost of that effort, he proposed a state budget that made a $75 million down payment the first year and another $50 million down payment the second year, followed by a 15 year $150 million dollar a year payment schedule that would complete the transition to GAAP.
At the time, I wrote that here at Wait, What?, “While the implementation was now scheduled to take place over 17 years and not immediately as he had promised, it was still a step forward.”
But of course, as we now know, with not enough revenues to cover expenditures, Malloy quietly decided to forgo even making those first two small down payments.
Now, two years into his term, the State has completely failed to implement the shift to GAAP accounting.
Incredibly, we could be looking at the very same situation when it comes to Malloy’s promised commitment to properly funding the State Employee Pension Fund.
For more background on this issue,
CTMirror: http://ctmirror.com/story/17515/malloy-seeks-modest-change-expected-pension-fund-earnings, http://ctmirror.com/story/15150/malloy-unveils-plan-reverse-two-decades-damage-employees-pension-fund
CTNewsjunkie: http://www.ctnewsjunkie.com/ctnj.php/archives/entry/state_pension_funds_lose_1b/, http://www.ctnewsjunkie.com/ctnj.php/archives/entry/malloy_seeks_changes_to_state_employee_pension_fund/