Gov. Ned Lamont at a recent company signing ceremony.
Connecticut's pension funding ratio has fallen by 10 percent since 2011. Photo Credit: CT SERS

Connecticut Pension Fund Restructuring Continues To Fall Short

A state employee pension fact sheet released this week by the state Office of Fiscal Analysis found that -- despite efforts to fully fund Connecticut’s state employee retirement system -- the funding ratio has dropped from 48 to 38 percent since 2011.

Connecticut’s unfunded pension liabilities for state employees totaled $21.2 billion as of 2018, according to the state’s valuation. The fact sheet listed the average active employee salary as $69,743 and the average pension as $38,284. 

Required payments to fully fund the State Employee Retirement System have grown rapidly since 2009, according to the information provided by OFA.

In 2009, SERS required $753.7 million per year in order to meet its annual required contribution. The state short-changed the pension fund that year by seven percent and continued paying less than the required amount by as much as 20 percent through 2011.

Connecticut officials have spent the past three years restructuring tens of billions of dollars in pension debt that dates back more than 80 years. Under former Gov. Dannel Malloy’s administration, Connecticut maintained 100 percent funding from 2012 through 2014. Payments through 2017 hovered around 99 percent.

Those recent years of fully funding the pension system were not enough to undo two decades of short-changing the pension system under a series of agreements between governors Lowell Weicker and John Rowland and the State Employee Bargaining Agent Coalition.

Connecticut state law required the pension system to be fully funded by 1985 and to maintain that funding level. Agreements between union leaders and past governors, however, overrode that statute and allowed Connecticut to short-change the pension system. The result was a ballooning payment system which is now harming other state spending.

According to the OFA fact sheet, annual payments into SERS are projected to grow to $1.7 billion by 2021, a nearly $1 billion increase since 2009.

Connecticut’s pension problem affects nearly every aspect of state government as departments struggle to cope with rising fringe benefit costs due to unfunded liability payments. 

Pension payments are part of Connecticut’s “fixed costs” which also include Medicaid, debt services and retirement health benefits. Combined, those costs now account for more than 50 percent of state government spending.

Malloy, in 2017, extended the payment period to pay off the pension debt through 2044 in an effort to prevent Connecticut’s payments from spiking too high. 

Gov. Ned Lamont is extending those payments again by a few years in a similar effort to balance the state budget.

Lamont announced he reached a deal with SEBAC leaders to reamortize the pension debt. Details have not yet been released. Lamont hopes to reach a similar agreement with Connecticut’s Teachers Retirement System. Lamont also is asking unions to allow a second refinancing of the state employee pension plan. Those negotiations are pending.

But while that task will be wrapped up soon, Wall Street warned state officials last week that Connecticut’s finances aren’t in the clear yet.

A new analysis from Moody’s Investors Services showed that Connecticut’s debt — even when compared with surging tax revenues — is worse than that of nearly all other states.

“Among the 50 states, Connecticut faces one of the most significant credit challenges stemming from unfunded retirement benefits,” Moody’s wrote in an analysis published on July 17.

Connecticut’s unfunded pension and retirement health care obligations, coupled with other debt, represented 39 percent of its gross state product — the value of all goods and services produced — in 2018, Moody’s analysts wrote. This is the highest among all states.

Connecticut’s net pension liabilities through 2018 represented 286 percent of its annual revenues — a ratio worse than that of all other states except for Illinois.

Required annual contributions to pensions, retirement health care benefit costs, and payments on bonded debt, together consume nearly 30 percent of Connecticut’s General Fund. 

Moody’s praised Connecticut officials for some of their recent efforts to stabilize a problem created by decades of inadequate savings for public-employee pensions between 1939 and 2010. And Connecticut’s emergency budget reserve, commonly known as the rainy day fund, is projected to grow to a record level $2.2 billion by the end of September.

“This Moody’s analysis echoes much of what Governor Lamont has been saying. Our unfunded liabilities are a significant problem for this state and that is why we have taken action to adjust the Teacher’s Retirement System assumed rate of return and payment schedule, strengthen the State Employees Retirement System without changing benefits, and expanded successful programs to help lower the costs associated with retiree health care,” said Melissa McCaw, Lamont’s budget director.

“These unfunded liabilities have taken generations for the state to accumulate and it is essential we continue to make our full employer contribution each year and do not fall into the bad habits of the past.”

Moody’s warned that the state employees’ pension has relatively low assets compared to the benefits it must pay out. That means Connecticut has “very little flexibility” to trim pension contributions any more without creating serious cash flow problems.

“Every responsible step we’ve taken in the last seven months—from the teachers’ pension restructuring plan to adding to our budget reserves—has been to solve for unrealistic investment return assumptions and decades of low contributions, which led us to where we are today,” state Treasurer Shawn Wooden said last week.