Pension outlook improves, at least a bit
In 2014, The Day published a series of stories that revealed the seriousness of the pension crisis confronting Connecticut. For decades state elected leaders had negotiated labor contracts with state workers committing Connecticut taxpayers to provide generous pension payments and health benefits, but had failed to set aside the funds to pay those obligations.
The result was a grossly underfunded state pension system that would require the legislature to provide ever larger payments to meet these obligations, crowding out spending for other programs.
The New Haven-based advocacy group, Connecticut Voices for Children, for example, reports that 20 years ago about 40% of state spending was devoted to education, health care, and social programs that support children, a figure that is now closer to 30%.
Nearly seven years later we can report that the situation has improved.
Gov. Dannel P. Malloy, serving from 2011 to early 2019, pushed lawmakers to begin setting aside the funding that would be necessary to get caught up. And while that catchup plan was effectively refinanced during the latter Malloy years to keep the payments manageable, thus extending the time to return the pension fund to solvency, that solvency at least has a target date of around 2050, according to actuaries.
Another step toward the light at the end of this long tunnel came this year when state Treasurer Shawn Wooden deposited $1.25 billion into the state employees’ pension fund, a payment that is being made in addition to the $2.6 billion in required actuarial payments into the state and teacher pension funds (the teacher pension system is also underfunded).
This one-time payment frees up an estimated $110 million annually that would otherwise have to come at the expense of other programs or via a tax increase.
After assessing the numbers, Comptroller Kevin Lembo called it “real relief that will both spare future generations from a legacy of pension debt and give short-term budget relief to taxpayers.”
Some smart policy moves got Connecticut to this point. In 2017, a “volatility cap,” a concept engineered by Sen. John Fonfara, D-Hartford, and backed by then co-chairs of Appropriations — Sen. Cathy Osten, D-Sprague and Sen. Paul Formica, R-East Lyme — was approved to block the legislature from spending a spike in income tax receipts tied to capital gains and other investment earnings. Such a spike has been seen over the past year.
Lembo, meanwhile, has pushed the state to build up its budget surplus, commonly called the “rainy day fund.”
Thanks to rising markets and the fiscal discipline imposed by the volatility cap, the rainy-day fund has reached its legal maximum of 15% of annual General Fund spending, about $3 billion.
Any surplus beyond that amount must be used, according to the system implemented in 2017, to meet underfunded pension obligations, resulting in the $1.25 billion that Wooden deposited into the state employees’ pension fund.
Current projections by the Office of Fiscal Analysis estimate that by mid-2023 Connecticut could be ready to make another $2.3 billion pension fund payment, in addition to its normal actuarial commitment.
Does this mean Connecticut’s pension problems are behind it? Hardly. The most recent report from the Office of Policy and Management, released last November, concluded the State Employees Retirement System liability is $36 billion, with $22.3 billion unfunded. About 88% of the money the state is setting aside annually is to address that unfunded liability.
Most of that liability — 73% — is tied to already-retired state employees. More recent contracts provided more sustainable benefits in retirement and greater employee contributions to pay for them. So, after peaking around 2025, the payments necessary to catchup will gradually decrease.
The lesson is that voters should award those elected leaders who are willing to stay the course and build a stable fiscal future for Connecticut. When The Day published its in-depth series in 2014, solving the problem seemed impossible. Now it seems merely daunting. That’s progress of sorts.
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 Tim Dwyer, Managing Editor Izaskun E. Larrañeta, staff writer Erica Moser and retired deputy managing editor Lisa McGinley. However, only the publisher and editorial page editor are responsible for developing the editorial opinions. The board operates independently from the Day newsroom.