As Gov. Dannel Malloy and the state legislature grapples with rising costs from unfunded pension liabilities, some Connecticut cities and towns have managed to tackle their own pension problems head on.
Municipalities like Danbury, Norwalk, Stratford and South Windsor have switched from defined benefit retirement plans to 401(k) style plans and changing retiree healthcare packages to stem the long-term costs to the towns.
In 2011, Stratford’s pension plan was 51 percent underfunded and the majority of retirees were making as much or more than their base pay salary. Stratford faced a $2 million deficit and Moody’s had downgraded its credit rating.
The problem largely stemmed from police and firefighter contracts. The town had switched the town and public works employees to defined contribution plans in 1999 but the police and firefighters remained on defined benefit plans. Stratford was able to negotiate with both the police and firefighters’ union that all new hires would be placed under 401(k) style retirement plans.
Stratford mayor, John A. Harkins, said the change will result in long-term benefits for the town’s taxpayers. “The closure of the defined benefit pension system for new hires is undoubtedly a win-win for the town’s financial outlook, as well as for Stratford taxpayers.”
Although Stratford took steps toward fixing the problem in the long term, the switch did not automatically create savings because the defined benefit plans were only for new hires. The town had to continue to pay current retirees and honor the contracts for current employees. In 2013 it took out a pension obligation bond of $162.6 million.
The City of Norwalk switched to a defined contribution plan in 2012 and raised employee contributions for their pension plan in yearly steps, from 4 percent in 2012 to 6 percent starting in 2018. Like Danbury, Norwalk maintained pension plans for police and firefighters but overtime is not included in the pension calculation.
Similarly, South Windsor switched all new employees to a defined contribution plan in 2013 after facing difficulty funding its retirement plans. Matt Gallagan, town manager for South Windsor, said the change in retirement benefits has “saved us millions.”
“Over the past couple years we were able to work with our employee unions and work with our officials to make the necessary changes.” He added that the town no longer pays out for accrued sick time and employees contribute 6 percent toward their retirement plan with the town matching.
However, many towns and cities are barred from retirement reform because their employees are enrolled in the Connecticut Municipal Employee Retirement System. The plan is managed far better than the state employee system but has recently declined in funding due to poor returns. CMERS is currently 85 percent funded.
Nearly half of Connecticut’s towns have at least one pension plan through CMERS. However, once enrolled in the CMERS system, towns are not allowed to opt out, even for new hires, unless they offer the exact same benefits.
While towns and cities have been making changes to deal with their long-term pension obligations, the state and municipalities continues to grapple with effects of unfunded pensions, which are one of the primary drivers of projected budget deficits at both the state and city level.
A forth-coming study on four of Connecticut’s major cities – Hartford, New Haven, Waterbury and Bridgeport – found that all four cities face serious unfunded pension liabilities, have more retirees than current employees, and are paying out more in benefits than they take in from employee contributions.
In December Malloy reached an agreement with the state employee labor unions to refinance rising payments by stretching the debt out past 2032.