One year left, Malloy still wrestling with pensions

Faced with choosing among bad options, Gov. Dannel P. Malloy has done a decent job of working with the legislature and state labor unions to address Connecticut’s severely underfunded pension plans. Certainly far more than his predecessors have.

While Malloy has not fixed the pension fund for state workers, his policies have improved the situation.

Now Malloy, entering his last year in office, is turning his attention to the teacher pension fund, also underwritten by the state and cash-starved.

In raising the issue, Malloy is following a familiar pattern. He is suggesting refinancing the state’s obligation to assure teachers get the pensions they were promised. This would push large pension payments further out into the future, and end up costing the state more, but would avoid massive balloon payments requiring cuts in municipal aid, reductions in state services and sharply higher taxes.

A 2014 study by the Center for Retirement Research at Boston College concluded that without any adjustments Connecticut’s obligations to fund the teacher retirement plan would exceed $6 billion annually in the early 2030s, before sharply declining in later years. It is not reasonable to come up with $6 billion just for teacher pensions in a state budget that now stands at about $20 billion.

Last year the legislature approved a plan to avoid similar balloon payments for the state-worker pension fund that were also to hit in the 2030s. Under that revised plan, pension contributions will peak at around $2.3 billion — costly but manageable. However, spreading out payments will add $14 billion or more to the cost.

While getting the revised payment legislation through the Generally Assembly — without any Republican votes — Malloy also won concessions from state labor unions. Under that deal, new workers are enrolling in hybrid pension/401(k)-style plans. Along with higher employee contributions toward their pensions, it creates a plan largely funded by the employees, at least going forward. The legacy costs for the gold-standard retirement plans of the past will be a drag on the state for decades to come, however.

In seeking a legislative deal to assure the solvency of the teacher pensions, we would expect Malloy to likewise pursue some structural changes that will lower the state’s obligation going forward.

Last legislative session, Malloy proposed that municipalities share some portion of the cost of funding the pensions for teachers who, after all, are employed by the local communities. The legislature balked at imposing this burden on towns and cities at a time when municipal aid was being trimmed.

Giving municipal school boards some skin in the game — by way of having to help pay the pensions — would provide an incentive to tailor labor contracts to reduce future pension obligations. Legislation to strengthen their hand in those negotiations and provide incentives to seek creative approaches to pension benefits should also be part of the solution.

The state is in this situation through no fault of Malloy’s, but because for decades Connecticut governors and legislatures did not come close to adequately saving to meet retirement benefit obligations. They were happy instead to spend money on ever-expanding services and pet projects, and — with less success — avoid tax increases.

Contrast Malloy’s approach with that of his predecessor, Republican Gov. M. Jodi Rell, and the Democratic legislature she worked with. Faced with a funding shortfall, they dug the hole deeper, borrowing $2 billion in 2008 to keep the teacher fund solvent. That debt could present legal hurdles in trying to realign payments into the pension.

Success in tackling this problem would be good news for whoever follows Malloy as governor, giving them one last thorny policy matter to deal with.

 

The Day editorial board meets regularly with political, business and community leaders and convenes weekly to formulate editorial viewpoints. It is composed of President and Publisher Pat Richardson, Editorial Page Editor Paul Choiniere, retired Day editor Lisa McGinley, Managing Editor Tim Cotter and Staff Writer Julia Bergman. However, only the publisher and editorial page editor are responsible for developing the editorial opinions. The board operates independently from the Day newsroom.

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