Pension Reform Options for Connecticut SERS

 

The recent collective bargaining agreement between Governor Malloy and the State Employee Bargaining Agent Coalition will not be enough to prevent the continued growth of unfunded liabilities in Connecticut.

There are good elements of the proposal: the expected investment rate of return SERS will be lowered to 6.9% and unfunded liabilities will be paid off on a more consistent basis instead of the current process of back loading payments.

But there are bad elements of the proposal: the agreement will actually lead to Connecticut taxpayers paying more towards pension debt over the next three decades by stretching out payments on certain unfunded liabilities over an extra 14 years. The process of shifting debt onto the shoulders of taxpayers in the 2030s and 2040s means at least $8 billion to $9 billion more in interest payments.

On the whole, the SEBAC agreement will be better for Connecticut than doing nothing, but it is not enough to stop the long-term growth of unfunded liabilities given the many other troubled aspects of SERS.

Looking forward, there are other pension reform ideas that Connecticut lawmakers should consider if they want to finish the project of pension reform. Additional improvements for the existing plan include:

  • Lower the Assumed Rate of Return Further to Around 5%
  • Increase Employee Contribution Rates
    • Moving all SERS employees to a 6% contribution rate would reduce taxpayer contributions by about $4.3 billion over 30 years
  • Adopt a Cap on Compensation Eligible for Pension Benefit Determination
    • Applying a cap of $100,000 for new hires would reduce employer contributions by about $4.1 billion over 30 years
  • Change the Formula for Cost-of-Living Adjustments
    • Setting the COLA at inflation up to a maximum of 2% would reduce employer contributions by around $1.3 billion over 30 years
  • Change the Definition of Compensation to Remove Overtime

Pension reform in Connecticut should go beyond improving the funding policy for the existing plan and adjusting the benefit design to help improve the solvency of SERS — the state should no longer put new hires into the existing, broken system. The plan design for new hires could take on any of the following forms:

  1. A Tier IV Defined Benefit Plan — that is priced with very conservative actuarial assumptions and designed with cost-sharing
  2. A Cash Balance Plan — that would guarantee a fixed investment return for individual employee accounts plus revenue sharing for years with big returns
  3. A Defined Contribution Plan — that would offer an employer rate similar to the current employer contribution plus an employee contribution that together would provide a robust retirement benefit
  4. A Combined Defined Benefit / Defined Contribution Hybrid Plan
  5. An Option for New Hires to Choose Between a DB-DC Hybrid Plan or Defined Contribution Only Plan

Finally, pension reform for Connecticut should also include adjustments to the governing structure for SERS, such as changing the management system such that parties with the most liability — currently the taxpayers — have an increased voice in funding policy decisions; and/or changing the process for determining contribution rates so employees and retirees share in the downside risk associated with funding policy.

Questions? Email Suzanne Bates, Director of Policy and Legislative Outreach, Suzanne@YankeeInstitute.org


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