Connecticut’s unfunded pension liabilities continue to grow despite efforts to curb the growing costs to the state.
In hard numbers, Connecticut’s unfunded pension liability – the money owed toward state workers’ retirement – has grown from $11.8 billion in 2010 to 20.4 billion in 2016, according to a fact sheet released Thursday by the Office of Fiscal Analysis.
During that six year period, Connecticut’s funding ratio has worsened. According to the report, in 2010 the pension system was 44 percent funded. Now it is down to 37 percent funded. Liabilities have grown from $21.1 billion to $32.3 billion during that same time period.
The pension system has suffered from lower-than-expected investment returns and decades of underfunding.
During the time period outlined in the fact sheet, the pension fund expected a return of 8 percent. This allowed the state to contribute less toward the pension fund by assuming it would grow 8 percent per year.
In reality, the fund only returned 5.25 percent over ten years, driving up the unfunded liabilities.
Earlier in the year the governor and union leaders agreed to extending the payments for the unfunded liabilities out to 2044 and lowering the discount rate to 6.9 percent in an effort to keep the costs from rising too rapidly.
Under the terms of the agreement, state contributions to the pension system will grow from $1.5 billion to $2.2 billion by 2027 and then level off and decline for the remaining years, essentially saddling future generations with the debt.
Legislative efforts to curb the cost of state employee pensions generated a lot of debate but no action during the 2017 session.
Proposals to switch new hires to 401(k) style retirement plans, eliminate overtime from pension calculations and to require a legislative vote on collective bargaining agreements were met with stiff resistance from union members and leaders who likened the reforms to turning Connecticut into “Arkansas.”
The recent union concessions deal negotiated between union leaders and the governor will do little to change the pension liability despite creating a Tier IV “hybrid” retirement system, which combines a traditional pension with a small 401(k) style retirement plan for new employees.
Under the hybrid system, state employees would still get a traditional pension but the employee contribution and payout calculation will be reformed. The employee would also contribute 1 percent of their pay toward a defined contribution plan.
The OFA estimated the SEBAC concessions agreement will lower Connecticut’s unfunded pension liability from $21.7 billion to $20.4 billion by 2019 largely due to the negotiated wage freeze and higher employee contributions to their pension plans.
The Malloy administration has generally paid the fully required contribution toward the pension fund since 2012. The previous administration under Gov. M. Jodi Rell, however, contributed only 93 percent in 2009 and 80 percent in 2010.
The pension fund has faced decades of underfunding due to budget shortfalls and deals struck between past governors and union leaders. According to state law, union leaders must agree to allow the state to underfund the pension system.
There are currently 50,000 active state employees enrolled in the state pension system, with another 48,000 retirees currently receiving benefits.