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Public pensions funded less than private counterparts

By Johanna Somers

Publication: The Day

Published February 09. 2014 4:00AM

Private companies' defined benefit pension plans, which must meet federal standards for prudent management, are becoming rarer. State governments continue to offer defined benefit pensions, but they don't have to follow the same regulations.

"If a business goes into bankruptcy or closes its doors immediately, it needs to settle (pay out benefits), whereas if you are the state of Connecticut, you assume the state will be around for many, many years," said Tonya Manning, president of the Society of Actuaries, a professional organization based in Illinois.

Connecticut's state employee pension plans are regulated by its own general statutes and collective bargaining agreements with labor unions. The funding schedule could change significantly through renegotiations, which is not the case in the private sector. The state gets more time to fund its pensions, but there is also the tendency to take the extra leeway to kick the can down the road and keep underfunding pensions.

Gov. Dannel P. Malloy is recommending in his fiscal year 2015 budget proposal that $100 million from the current year's budget surplus be put toward state pension funds, which his office estimates would lower the state pension debt obligation by $430 million.

One other thing the state can do without renegotiating any contracts is to re-examine the rate of return its pension funds get on their investments.

Many actuaries are recommending that those in charge of public pension plans lower the assumed investment rate of return.

"The world is a different place than it was 15 years ago when many assumptions were set," said Manning. The trend has been to lower the assumed investment rate of return, which "is appropriate," she said.

Connecticut's main pension plans use an 8 percent to 8.5 percent assumed investment rate of return.

From fiscal year 2004 to fiscal year 2013, including the most recent investment return of 14 percent for fiscal year 2013, the Connecticut State Employees Retirement System's pension had a compounded market value rate of return of 7.1 percent and the Connecticut State Teachers' Retirement System's pension fund had a 7.3 percent return.

On average, states use a 7.72 percent assumed investment rate of return to calculate their pension liabilities and how much they need to contribute each year.

The Pension Protection Act of 2006 required private pension plans to use a 25-year average bond rate of around 5 to 6 percent and fully fund their pensions in about seven years, said Donald Fuerst, senior pension fellow at the American Academy of Actuaries. Private companies had to put more pension expenses on their budget books.

Standard & Poor's 1500 Index reports that private companies' pensions were funded at an average of 74 percent in fiscal year 2012, according to Mercer, a global consulting firm. Connecticut's two main pension funds combined were funded at 49 percent as of June 30, 2012, the most recent actuarial valuation.

A 2013 Moody's report said that if Connecticut were to lower its assumed investment rate of return to 5.47 percent, as Moody's Investors Service did, to reflect a corporate bond rate of return, the unfunded liabilities for Connecticut's two largest pensions, based on 2010 figures, would increase to $42 billion from $20 billion.

"Something in that 6 percent range, 5 or 6, might be a more realistic return, because that allows you to have happy surprises versus disappointing moments, but there is going to have to be agreement on that," said state Comptroller Kevin Lembo in September.

Julie McNeal, director of finance and operations for the Connecticut Society of CPAs, said she thought that 8 percent was "very ambitious."

Malloy's budget chief, Benjamin Barnes, said he would agree that an 8 percent assumed investment rate of return and higher is "overly rosy," but said he thought that those who argue for a 4 percent assumed investment rate of return were being "unduly pessimistic."

He said he supports the actions of the state's retirement commission, which decides what rate of return to assume in its calculations. If they want to reduce the 8 percent assumed investment rate of return, they have to give a lot of thought to it, he said.

"By doing that, that increases the ARC (annual required contribution) and pulls on the general fund budget," Barnes said. That "is always a challenging thing to do; having to spend money on that instead of other things."

j.somers@theday.com

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