A Wall Street Journal story linked General Electric Co.’s planned move to Boston to worries over Connecticut’s woeful funded ratio for its public pension system.
So Connecticut has a plan and it would not change what union members would receive when they retire nor would it add or cut pension benefits. All it would do is raise the funded ratio just like Pension Obligation Bonds (POBs) have been doing.
Here is how it would work…..
Taking numbers from the WSJ story:
Under Mr. Malloy’s proposals, one pension fund would cover employees and retirees hired before July 1, 1984, who account for 72% of the system’s $14.9 billion unfunded liabilities. This fund would be a so-called pay-as-you-go plan: The state would make dedicated annual payments from its operating budget to pay for the benefits but no longer invest the contributions.
And just like magic those liabilities are off the books. As with bond repayments on POBs they move into debt. As for the other participants.
A separate fund would cover workers and retirees hired on or after July 1, 1984. Benefits for these workers would be almost entirely paid for using the state employee pension fund’s current assets of $10.6 billion which would continue being invested.
This then becomes the plan that is valued and doing some quick math (in billions):
- Total liabilities: $14.9 + $10.6 = $25.5
- Funded ratio: $10.6 / $25.5 = 42%
- Pre-1984 participant liabilities: .72 x $14.9 = $10.7
- Post-1984 participant liabilities: $25.5 – $10.7 = $14.8
- Official funded ratio after the split: $10.6 / $14.8 = 72%
Without changing any benefits Connecticut raises their magic number from a scary 42% to what other big companies and bond-buyers might be gulled into considering a manageable 72% with the only question being whether there will be a footnote in the pension part of the financial statements about the pay-go part. I don’t remember ever seeing one about New Jersey POBs and that passes for honest disclosure these days.