In a meeting on Wednesday, Connecticut legislators narrowly approved a resolution that postpones fully paying accumulated pension funds to state employees for 13 years and changes how those payments are calculated.
According to the previous plan, the government was expected to pay off $67 billion in the unfunded liabilities share of pensions by 2032, Office of Policy and Management Secretary Benjamin Barnes said. Under the new plan, approximately half of that sum would be paid off by 2032 and the rest by 2045.
Pensions are financed in two portions, normal costs and unfunded liabilities. Normal costs are the portion of pension payments paid into by employees during their working years, while the unfunded liabilities share is the amount the government plans to pay to meet the benefits of employees after retirement. This sum is based on an actuarial estimation that takes into account factors such as returns on state investments, life expectancy and future salaries.
In order for a state’s pension to be considered fully funded, 80 percent of the unfunded liabilities need to be paid. Connecticut is currently meeting 32 percent of unfunded liability costs, according to Chris McClure, public information officer at the Office of Policy and Management.
Two factors have caused the state’s current accumulation of unfunded liabilities. First, from 1939 until 1971 these liabilities were not pre-funded — meaning the government did not save money destined specifically for this fund. Additionally, actuarial estimations have underestimated the amount the state needed to pay into the system, largely as a result of overestimating investment returns.
To address the issue of actuarial underestimation, the state legislature decreased expected returns on investment from 8 percent to 6.9 percent in December, Barnes said. This more conservative expectation reduces risk at the cost of increasing the state’s future unfunded liabilities by $500 million for the upcoming fiscal years. He added that considering the state’s projected budget deficit for both the 2018 and 2019 fiscal years, the state would unlikely have met this increased amount.
“That would require enormous tax increases and budget cuts,” McClure said. “We can’t borrow for this expense. It would destroy the state’s credit.”
The resolution also has measures in place to smooth out employee payments. Under the current system, payments to the pension fund were planned to increase from about $2 billion in 2018 to $6.6 billion in 2032. The new payment scheme increases the actuarial window, making estimates more accurate and smoothing out payments over time, which will now stabilize at $2.5 billion.
The measure was passed 76–72 in the state House and 18–17 in the state Senate, with voting falling mostly along party lines.
“The notion that we are smoothing payments so that we don’t have our budget go from a $1.5 billion deficit to a $6 billion deficit seems smart to me,” said Representative Josh Elliott, D-Hamden.
Representative Gail Lavielle GRD ’81, R-Wilton, had a very different view of the issue. She noted that spreading out payments over a longer time frame would make the total cost more expensive due to inflation. The real solution, according to Lavielle, would be renegotiating with labor unions to decrease benefits or increase employee pension contributions.
Though Barnes supported the resolution, he agreed with Lavielle on the issue of labor negotiation.
“The only way to reduce cost in a meaningful way would be to reduce benefits,” he said.
He emphasized that the goal of this plan was not to reduce cost, but to spread out payments. He also said that the resolution’s partisan vote was “unexpected,” as the Appropriations Committee of the Connecticut General Assembly voted overwhelmingly in favor of the measure — 30–10 in the House and 10–2 in the Senate — before it went on to the state legislatures.
“There is no reason why a rational human being would not pass this deal. It is markedly better than what it … replaced,” Barnes said. “This was made into a partisan issue … even though frankly in my opinion there is no underlying partisan issue here.”
The current state employee pension system was developed in 1939.