In a clear demonstration that discount rates matter for pension funds, Connecticut saw its pension liabilities increase by $9 billion after lowering its estimated rate of return by a total of 1.6 percent for its two major pension plans.
According to Connecticut’s Comprehensive Annual Financial Report, the state employee retirement system’s liabilities grew $6.5 billion and the teachers retirement system liabilities grew $2.8 billion in one year.
To be sure, the debt itself didn’t change but rather how Connecticut measures it to report on its balance sheets.
But the way in which pension debt is measured matters for both lawmakers and taxpayers.
High discount rates understate pension liabilities by assuming growth and allow the state to pay a smaller annually required contribution, essentially underfunding the pensions.
Gov. Dannel Malloy’s administration has made the full pension payment every year of his tenure, but that alone has not stopped the liabilities from increasing, in part because Connecticut used too high a discount rate — 8 percent for SERS and 8.5 percent for TRS.
During 2017, Malloy negotiated to lower the discount rates to 6.9 percent and 8 percent respectively and the new rate is reflected in the state’s 2017 CAFR.
The new valuation increased Connecticut’s stated liabilities by more than $9 billion.
“Because investment earnings account for a significant source of revenue for public pension funds, the accuracy of the return assumption has a major effect on a plan’s finances and actuarial funding level,” the State Comptroller’s Office wrote in an email.
Moving forward, the Comptroller’s Office expects the decreased discount rate “should help stabilize changes between valuations,” but added that the assumed rate of return is not the only factor affecting pension liabilities.