Unfunded Pension Liabilities: Should Lawmakers Worry?

by Christine Stuart | Jun 15, 2010 5:00am

Recent reports single out Connecticut as one of the wimpiest states when it comes to funding its pension liabilities and retiree benefits, but is it something lawmakers should be worried about?

A recent report by two University of Connecticut economists says it is, but one union official gives their paper a “C-“ for being incomplete, while one lawmaker says it shows the state should be doing more and yet another believes it’s still on the right path.

A report published in the summer edition of The Connecticut Economy by Peter Barth and Arthur Wright concluded the state‘s unfunded pension liabilities along with its unfunded retirement benefits, will create “serious long-term consequences for economic growth and jobs, especially through effects on business location decisions.”

“Yielding to temptation under budget duress to reduce or postpone payments meant to strengthen the funding of retiree obligations will only compound the problems,” Barth and Wright wrote. “In effect, doing that is filling current-spending holes with material dug from future-spending holes.”

The two economists based their report partially on information the Office of Policy and Management which says the Nutmeg states’ unfunded retiree liabilities jumped to $42.6 billion on June 30, 2008. That’s a 22.1 percent increase from 2006. And the rise was despite the $2 billion in bonds injected into the Teachers Retirement System in 2007.

“The prime source of the boost was, of course, the financial market meltdown. But more retirees (in part due to retirement incentives) and rising health care costs doubtless contributed,” Barth and Wright wrote.

Connecticut’s unfunded liability for state retiree pensions and benefits totals $7,395 for every man, woman and child in the state, based on 2009 Census figures. Compared with more other states, Nutmeggers’ liability is 2.6 times New York’s, 3.2 times Massachusetts’, and 4.4 times California’s.

“The segue in this riff: Can anyone think of an area of Connecticut’s state budget that is ripe for cuts?” Barth and Wright wrote.

Bob Rinker, executive director of CSEA/SEIU Local 2001, said the report ignores the changes made in 2009 to the State Employees Bargaining Agent Coalition agreement.

He said under the 2009 SEBAC agreement all new employees contribute 3 percent of their salary to health insurance and all employees with the five years of state service contribute 3 percent until they reach 10 years of service.

“There’s a lot of money coming in to reduce the unfunded liabilities,” Rinker said Monday. He said the $26 million in unfunded post retiree benefit cited in the report is reduced substantially by those two measures.

He said changes made in 1997 also reduce the liability by creating a Tier II and Tier IIa retirement plan. The Tier I employees, who receive the richest retiree benefits, are dying and new employees are coming in and paying more into the system, he said. There were also provisions added to move the age employees received their benefits closer to the age of Medicare eligibility.

Over fiscal year’s 2009, 2010 and 2011 state employees agreed to allow the state to delay $314 million in pension contributions to help it close the state budget deficit.

“We agreed to some forgiveness because we didn’t want to see cuts in services,” Rinker said.

House Minority Leader Lawrence Cafero, R-Norwalk, said he disagreed with the decision to delay the pension contributions.

“We rejected that and fully funded it in every budget we proposed,” Cafero said Monday.

He said he doesn’t understand why the state employee unions would agree to allowing the state to balance the budget on the backs of retired workers. He said the state should pass a constitutional amendment which forces it to fund the pensions at a specific level.

“We fundamentally disagree with that simplistic solution to the problem,” Rinker said of the suggestion for a constitutional amendment. He said it ignores the fact that the pension is something negotiated.

The contract which includes the current state employees health and pension benefits doesn’t expire until 2017.

House Speaker Chris Donovan, D-Meriden, agreed with Rinker. He said this movement to get rid of pensions and replace them with private 401k type investing tools “doesn’t seem like a good idea.”

“Movement away from pensions makes people less secure,” Donovan said.

He said if the report doesn’t point out that these investments are made over long periods of time then it’s not accurate. He said if the mortgage came due on someone’s home over night they would have a hard time paying it, which is why mortgages like pensions are spread out over 30 years.

“Forces try to put down pensions, but without them middle America would be lost and worried about their futures,” Donovan said. “We want to be constructive and make sure seniors are secure.”

Barth and Wright conclude that state lawmakers have three broad choices when it comes to solving the $42.6 billion unfunded pension liability.

The state can increase its contributions, a solution which the two conclude “would face strong headwinds—more like head-gales.” They also suggest reducing future costs, which they admit is a direction the state has been moving in for years, however, they described the movement as being at a “glacial pace.”

And last but not least the two suggest the state could seek a higher rate of return by making riskier investments. Admittedly, “the problem with this ploy is that higher investment returns are always associated with higher risks,” Barth and Wright wrote.

“To end on a political note—for that’s ultimately where the solutions have to come from—we repeat Wright’s question from the last issue (on the State’s budget crisis): Why are there so many candidates for Governor this election year?”