The Great Connecticut State Employee Pension Fix of 2012 ---- A Bust!

The Great Connecticut State Employee Pension Fix of 2012 —- A Bust!

Sep 23

jonpeltoBen Barnes (OPM Secretary), Budget Cuts, Malloy, Pension, Spending Cap Barnes, Malloy, State Employee Pension 15 Comments

Attention Connecticut Taxpayers…

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/

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JMC

Malloy and the Blue legislature grabbed an extra $200 from every tax-paying CT homeowner in State taxes last April and distributed it in free money as an Earned Income Tax Credit (which came in over budget by c. $20 million) to low/no income filers (my local CT Rep, Mae Flexer, a protege of Don Williams, introduced this new EITC in January of 2011 just after her re-election. I don’t recall that she mentioned that intent in her campaign nor has she mentioned it in ANY of her mailings since). Malloy’s and many Dems’ goal is wealth redistribution and a permanent one-party Blue welfare state, not fiscal solvency. Same as their idol, Obama. This is not how businesses are attracted to CT, despite all the noise about jobs, jobs, jobs, that local CT Dem and Repub reps are blathering. Only California has greater future unsustainable obligations. I now see that Christine Stuart at CT News Junkie reports that since the new CT fiscal year begun July 1st we are already $26 million in the red. Look for things to get worse.
- buygoldandprosper
  
  No state can compare to the nation state of California. It is like comparing the US to Denmark. Apples and oranges. California is a mess,but will come back.
  Connecticut is a mess and does not have the ability to come back.The Nutmeg State falls three steps back when the economy hiccups and takes a half-step forward when times get good. The quality of life is in a perpetual decline and there is no way to catch up. It is no longer a political matter. It is more like terminal cancer.
- msavage
  
  JMC–please stop with the partisan nonsense. “Wealth redistribution” is the problem, huh? It’s the EITC that’s causing all our problems? Really? Let’s just make this clear–”wealth redistribution” goes both ways. How about Dan’s millions in corporate welfare to Bridgewater Associates? Ray Dalio, Bridgewater’s head, is the highest-paid hedge fund manager in the WORLD, raking in $3.9 BILLION dollars in 2011. No, that’s not a typo. BILLION! Check it out if you doubt me:
  http://articles.courant.com/2012-08-15/business/hc-malloy-first-five-economic-announcement-20120815_1_new-headquarters-tax-credits-investments-for-pension-funds
  Come on, JMC–you really think the scrap that Dan threw to struggling citizens in CT is the problem here? It couldn’t be First Five Jive and other means with which Dan is shoveling more money up to the already-wealthy? Dan threw a little scrap down to us to distract from the meaty drumsticks he’s tossing up to people like Ray Dalio. It’s a distraction, JMC. And you’ve fallen for it hook, line and sinker. PLEASE stop getting your information from Fox news. It’s nothing more than propaganda.
  - JMC
    
    msavage – Can you tell me how much that “scrap” cost? You might be surprised. Look it up. Facts are important, and conclusions can be drawn from them. We are of course entitled to our own conclusions and opinions, but not to our own facts. Your snarky assertion that I get my opinions from Fox News is incorrect; I have had no network TV at my house for 9 years. I voted (regrettably) for Mae Flexer (D Danielson). This is a political opinion posting site. I am sorry you are offended by other (supported) opinions. This nation is now $16 trillion in debt.
    Apparently you and I agree that the chief figures of the CT Dem party are now corrupt beyond redemption.
  - msavage
    
    I believe I read the EITC would cost appx. $110 million dollars per year–that’s spread out among the nearly 200,000 struggling families who qualify for it in CT. Here’s a link that confirms that: http://www.taxcreditsforworkingfamilies.org/state/connecticut/
    Coincidentally, I think that the Bridgewater welfare package was worth about the same amount? A little bit more ($115 million, according to the article I linked above). So, 200,000 struggling families share approximately the same amount of $$ that the highest-paid hedge fund manager in the WORLD is handed by our governor on a silver platter. Ray Dalio made $3.9 BILLION dollars last year. BILLION! And where are your opinions supported? At least I provided a link to back up the Bridgewater claim–you told me to look up the EITC figures myself.
  - jonpelto
    
    Excellent point!
    
    Sent from my BlackBerry please excuss typos
  - JMC
    
    You did look up the EITC yourself and are to be commended for it! I did happen to know the figure also myself. I would be interested in learning how large you believe the EITC would ideally be and who should pay for it.
  - msavage
    
    I don’t have any opinion re how much the EITC should be or who should pay for it. Honestly, I don’t believe there would be any need for the EITC if the economy weren’t in such horrible shape. And I don’t think the economy would be in such horrible shape if corporations weren’t allowed to manipulate the legislature into passing laws that favor them and only them. If corporations were actually using the trillions of dollars that they are now hoarding to create jobs and invest in this country, many people who have seen their incomes decrease over the past 10 years would be in good enough financial shape to fend for themselves WITHOUT the EITC.
    
    That said, are you really OK with the fact that our governor handed the SAME AMOUNT of money to Ray Dalio as he handed to nearly 200,000 of our state’s poorest families COMBINED? That’s just fine with you, but the EITC makes your blood boil? It’s OK that people like you and me are paying a higher tax rate so that Malloy can hand millions over to a man who made $3.9 BILLION last year, but it’s not OK that struggling families get thrown a bone? And Bridgewater is just ONE of SEVERAL corporations who have received welfare at taxpayers’ expense. And that’s just the money that exchanges hands between this administration and vulture capitalists out in the open. I will never understand the logic of being OK with the corporate welfare, but NOT being OK with helping folks who are having a hard time putting food on the table. THAT makes MY blood boil!
  - JMC
    
    Of course the Dalio business is outrageous and disgraceful. Why do you assume it’s OK with me? Just because I didn’t express an opinion on it before? I fought against corporate welfare on the ground and with my time and my own hard-earned money, when a huge – and I mean HUGE – Lowe’s warehouse was proposed for my distressed town, to be built in a peaceful rural residential neighborhood. The hitch – the town would have to cough up $9 million for roads and infrastructure just for Lowe’s. This divided the town, but Lowe’s won and got the money. The town official most responsible for sneaking in the warehouse was convicted of an unrelated felony crime, ultimately lost his town job, and was given a new executive position at the very warehouse he had facilitated – in a company where you can’t get a job cleaning toilets with 3 parking tickets. Another, I believe, was connected with a company that got the paving contract. Lowe’s brought in construction workers from South America and then paid them under CT minumum wage, which was exposed in the newspapers. They were working putting on the roof at midnight over New Year’s Eve in weather that was, with wind chill factor, 20 degrees F below zero. Very few local people got any jobs in the construction. Lowe’s never kept its promise to provide noise and sight abatement for the affected residents.
    Corporate welfare can sometimes be good – when jobs are afforded distressed areas (that of course was Lowe’ pitch in my town), but I agree that sharks like Dalio are only looking out fro themselves. And sharks like Malloy. On the other hand, $110 of taxpayers’ money is not a scrap or a bone.
  - JMC
    
    Read $110 million in the next to last line
  - msavage
    
    I’m glad you fought Lowe’s. I wish more people would fight these corporate monsters rather than welcoming them with open arms, thereby putting small businesses–businesses owned by their own NEIGHBORS–in peril. There is a “road to nowhere” in my town that some of the “town officials” would like to turn into a high-end stip mall, from what I hear. They’d love to see The Gap, Old Navy, Coldwater Creek, that kind of place come in. I believe they’d also like to see a grocery store. There is a grocery store right across the street, owned by a local family, that is highly involved with the community. I don’t understand how people can can NOT think about local business owners like the folks that own this grocery when they talk about “expanding the economic base” in town. Yep, business taxes would be great. But at what cost?
    Re the $110 million for EITC. I guess it’s relative. From my perspective, $110 million spread out among nearly 200,000 struggling families is peanuts when compared to the hundreds and hundreds of millions that Malloy is wasting on other crap such as the Bridgewater insult.
  - JMC
    
    msavage – I am glad that we share some common beliefs. I agree that big businesses should not steamroll local merchants and landscapes. BTW, I didn’t even get to the part where the Lowe’s warehouse got a special State tax break from Gov. Roland! But ultimately I assume these tax breaks are approved by the legislature.
    Thanks for reading my Lowe’s post. Also, the politicians in my town – both political parties were guilty – who brought in this monstrosity were denied office again by the large number of voters who were turned off by the whole thing.
buygoldandprosper

Dan likes to compare Connecticut to other states and all he has to do is look to RhodeIsland,if he has not already. Suspending COLAS,delaying retirements,”hybrid schemes” and the favorite…bankruptcy.
No doubt Dan has a plan and a scapegoat already picked to explain his press coverage this summer:
“Dannel Malloy restructured Connecticut’s plan, helping to save the state nearly $6 billion over the next two decades.”
Wow! Two decades. Today in The Courant they used the same kind of extrapolation about jobs that will follow the corporate welfare given to JacksonLabs…fuzzy math,indeed.
Dan got his headlines and moved on. We are expected to read the headlines,believe them,and move on with Dan,even though the road diverges in 2014.
Dan Malloy is a dangerous politician and has pretty much failed with all his “visions” so far except on the corporate welfare front,bashing unions,attacking public education,wasting time on international travel,getting his wife a $200K job passing out state money,surrounding himself with sycophants and running for his next public office/appointment. And I am not all that aware of what is really going on in this state!
Expect the worst. Higher taxes are a lock.Bankruptcies a possibility. Shrinking revenue a sure thing,even with spectacular Fall Folliage!
Dan needs some new “visions” that actually work,but he is a belligerant,bellicose man with limited intellect,in spite of what his spin-masters have told you !
mookalaboona

Let’s not forget that the public school teachers retirement situation is also in trouble by billions. This has been a problem for a few governors, no one wants to take the bull by the horns and fix it. Some will even remember that Rowland was going to take money from the STRS and fund the proposed Boston Patriots stadium in Hartford with the money. What a joke, they haven’t funded this at 100 percent for years and years.
http://www.facebook.com/people/Rich-White/100000066062155 Rich White

By 2016 when we are in another recession CT wil have to deal with their pension problems openly.
I vote that we screw them. this didn’t happen n a vacuum . This happened because SEBAC thinks the court is on their side and can always force compliance.
I want Jerry Brown reforms. And end ot Haz Duty and Pension Spiking and I want gve backs at the expense of the grifters. Then we can stabilize the system for the 80%. with a 3-part solution: social security, 401Ks and defined with a total cap in the median income range (approx what the average teacher gets).

Wait, What?