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Legacy of pension neglect tough to reverse

Published January 12. 2014 4:00AM   Updated January 12. 2014 9:15AM

This is the first of two editorials on consecutive days concerning the underfunded state employees' pension system and the steps necessary to repair it.

Approaching the 2009 fiscal year, Connecticut's Democratic-controlled legislature and its Republican governor, M. Jodi Rell, faced a worsening fiscal outlook. Gov. Rell didn't want to raise taxes to fix it. Democrats did not want to cut programs.

Instead, they mortgaged the future - again.

Between fiscal years 2009 to 2011, the state deferred paying $315 million into the pension plan for state employees, according to numbers provided by the current administration. The legislature and Gov. Rell did this despite knowing the pension plan was grossly underfunded and that putting off the payments would make the situation worse and end up costing taxpayers more in the end.

This has been the sorry history of pension plans in Connecticut and in many other states, a legacy of trading short-term gain - avoiding tax increases, increasing spending and mollifying state labor unions - for long-term pain. Because in the long term, when the inability to meet promised pension obligations becomes too obvious and immediate to ignore, someone else would be running for office. So went the mindset.

This was certainly apparent in the mid-1990s when Republican Gov. John G. Rowland reached a deal with state employee unions to lower state investments in the pension system. The approach held the lid on taxes, but it was not remotely prudent fiscally. The numbers only worked because of unrealistic balloon payments cooked into the deal about 35 years later - $3.3 billion in 2029 and $4.5 billion in 2030 - the latter number more than half the entire budget at the time Gov. Rowland struck the pension agreement.

A 2012 state report estimated that decisions to reduce pension contributions below actuarial requirements have totaled about $1 billion since the late 1990s.

As outlined today in the first of a three-part series on the state's troubled pension system by Day Staff Writer Johanna Somers, the list of causes for the awful state of affairs is long. Retired Connecticut state employees receive the highest pension payments in the nation, but make employee contributions below the national average. Those in many state occupations can retire younger than can workers in the private sector, meaning pension pay stretches out longer. Overtime pay in closing years of service boosts the pay numbers on which the state bases pension payments.

The result is that as of 2012 the Connecticut State Employees' Retirement System was funded at 42.3 percent, roughly half of the 80 percent expected of a reasonably healthy pension plan, leaving Connecticut behind only Illinois in terms of underfunding pensions.

To his credit, Gov. Dannel P. Malloy, after his election in November 2010, did take steps to improve the situation. A renegotiated contract with state unions increased the retirement eligibility age for many state employees. It terminated former agreements that allowed the state to contribute less than actuaries recommend. It also requires all state employees to pay into their retiree health care fund.

The governor and legislature set up a state pension contribution plan that eliminates the balloon payments created in the Rowland years and, theoretically at least, would reach the 80 percent goal of ratio to assets around 2025.

Yet the rosy outlook is dubious. State contributions into the pension plan are set at $1.27 billion for the current fiscal and are scheduled to grow to nearly $1.6 billion by 2017-2018, eating up larger chunks of state spending and crowding out other programs. It is questionable whether future legislatures will be willing to meet the commitment. Contributions to the two major retirement systems - for state workers and public school teachers - are already the fifth and sixth largest line items in the state budget.

The assumed rate of return on pension investments, now 8 percent, may also well be high.

While Gov. Malloy has made a start at averting a pension crisis, more steps will be necessary, with the state making the kind of hard choices seen at many private sector companies. Monday's editorial will explore some of those options.

For additional pension data go to www.theday.com/ctpensionproject

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Join the conversation

As part of its CT Pension Project, The Day has arranged for pension experts to hold live chats on theday.com this week.
Monday, Julie McNeal, CPA and director of finance and operations for the Connecticut Society of CPAs, will answer questions from noon to 12:30.
Tuesday, Dan Livingston, a Hartford attorney who represented the unions in the 2011 State Employees Bargaining Agent Coalition agreement, will answer questions from noon to 12:30 p.m. Check in at www.theday.com/ctpensionproject and email your questions to j.somers@theday.com or Tweet them using #ctpensionproject

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