Connecticut Governor Dannel P. Malloy and state employee unions announced an agreement Friday to restructure (i.e. reduce) pension payments:
The deal was reached after months of behind-the-scenes talks regarding the funding calculations as the state was facing potentially huge future pension payments and tried to “help avoid the fiscal cliff the state would otherwise face in the coming years,” the administration said.
The agreement, which still requires approval by the state legislature, was not designed to change any benefits for current or retired state employees. Instead, it was crafted to make sure that the state could have more predictability in funding the pension system in the coming years — by restructuring the system and extending some payments over an additional 14 years.
“It was incumbent upon us to reform this system before facing the fiscal crisis that could have resulted from $4 [billion] to $6 billion annual payments,” Malloy said. “This agreement does not alter employee benefits or employee contributions in any way. It simply allows the state to fully fund its obligations at realistic amounts that will end with Connecticut resolving the unfunded liability and emerging with a system that is fully funded. We are holding true to the ideal of improving the financial landscape for future generations.”
Where would they get the idea that reducing contributions while making no changes in underlying benefits leads to long-term solvency?
The Center for Retirement Research at Boston College released a report last year on Connecticut’s State Employees Retirement System (SERS) and Teachers’ Retirement System (TRS) that suggested giving the state more time by:
- separately financing – over a long time horizon – the liabilities associated with members hired prior to pre-funding,
- shifting to level dollar amortization of unfunded liabilities,
- replacing the 2032 full funding date with a reasonable rolling amortization period, and
- lowering the long-term assumed investment return.
At the time, after reviewing the situation with the SERS and TRS plans, I dismissed the report as a cynical disregard of reality to pander to political expediency. Apparently that’s exactly what Connecticut officials were looking for.