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Agreement to Shore Up State Employees' Retirement Security

JPE Union Board

 

Gov. Dannel P. Malloy announced a deal Friday with state employee unions that would allow Connecticut to dodge a fiscal iceberg by holding down annual pension costs otherwise set to spike over the next 16 years.

But to get that relief, Connecticut would shift at least $13.8 billion in estimated pension expenses owed before 2032 onto a future generation.

Under the deal, the state still would pay hefty pension bills for the next 16 years, with annual costs rising from $1.6 billion to $2.2 billion over that period. But pension expenses that were supposed to drop as low as $300 million per year after 2032 would hover close to $1.7 billion in the 2030s and 2040s.

The plan does not affect benefit levels for current or future retirees, nor does it change workers’ pension contributions.

The plan allows the state to spread pension fund investment losses or gains deeper into the future. This would make pension costs less volatile. But if Connecticut consistently struggles to make its investment targets, annual costs could rise beyond targeted levels.

The agreement, which echoes some aspects of a plan Comptroller Kevin P. Lembo unveiled in January, also calls for the State Employees Retirement Commission to adopt a more conservative, 6.9 percent return on state investments to better reflect current financial markets.

The State Employees Bargaining Agent Coalition’s governing board ratified the deal on Thursday. The matter still must be considered by the General Assembly.

Could CT survive a $6 billion pension bill?

“I am very grateful to SEBAC leadership that we were able to reach this much-needed and forward-looking agreement,” Malloy said Friday. “It was incumbent upon us to reform this system before facing the fiscal crisis that could have resulted from a $4 billion to $6 billion” annual pension bill.

“Glad to see that an agreement has been reached after all proposals were put on the table,” Lembo said. “I am reviewing the details of this final agreement now, but this appears to be an important step.”

Union leaders praised the deal.

“The agreement is a responsible way to move the state employee retirement system toward stability – protecting members’ retirement security,” said AFT Connecticut President Jan Hochadel. “It’s also a traditional approach that creates a clear path to paying off past obligations – making it good for the public too.”

“Real pensions play an important role in Connecticut’s economy by supporting jobs and generating purchasing power in our communities,” said Salvatore Luciano, executive director of Council 4 of the American Federation of State, County and Municipal Employees. “This agreement is part of a larger policy imperative by our unions to create retirement security for all.”

Though the deal doesn’t affect pension benefits for current and future retirees, the administration and unions are continuing to negotiate. Malloy approached the unions earlier this year asking for more traditional concessions, such as wage and benefits givebacks.

For now, though, the agreement shifts a heavy burden to a future generation on the argument that the present one simply cannot afford to pay the full burden it faces.

On paper, Connecticut’s annual contribution to the state employees’ pension – currently $1.6 billion – would rise to $3.3 billion over the next 16 years under the current system. But that hinges on pension investments achieving, on average an 8 percent return, which state officials, economists and others have said no longer is a realistic assumption.

A study the administration commissioned in 2014 from the Center for Retirement Research at Boston College showed that state contributions to the employees’ pension could skyrocket if the return, for example, is closer to 5.5 percent per year.

Under that scenario, the annual cost would hit $3 billion by 2025, $4 billion by 2029, $5 billion by 2030, and approach a whopping $6.6 billion by 2032.

KEITH M. PHANEUF / CTMIRROR.ORG

Comptroller Kevin Lembo

If Connecticut could survive that, though, past mistakes would have been corrected and the annual contribution would plunge dramatically, down to $300 million or less.

But Malloy’s budget director, Office of Policy and Management Secretary Ben Barnes said this fall that an annual payment topping $6 billion would be “suicidal to state government,” forcing “unsustainable” tax hikes and unprecedented cuts to vital programs.

Under the new agreement, this year’s $1.6 billion annual cost essentially would remain flat next fiscal year. It originally was supposed to increase by about $84 million. But after that it would rise steadily until it reaches $2.2 billion in 2022.

It could remain there — depending on how pension investments fare — until 2032.

It would drop below $1.8 billion in 2033 and, from there, it would remain close to $1.7 billion through at least 2046.

The new arrangement would come at a cost to the state, an expense that accountants and other analysts typically refer to as a “lost investment opportunity.”

Because the deal would reduce overall state pension contributions between now and 2032, Connecticut would have less pension resources to invest over that period. The state not only must make up for those deferred contributions after 2032, but also attempt to replace the investment earnings those unmade contributions would have returned.

The Malloy administration did not release an estimate Thursday of that lost investment opportunity. But a spokesman said the cost could be calculated in the coming weeks after an actuarial analysis of the new pension funding plan is completed.

This plan could be approved, under current legislative rules, without a vote from lawmakers, provided neither the House nor Senate vote to reject it within 30 days after the 2017 session begins on Jan. 4.

Senate President Pro Tem Martin M. Looney, D-New Haven, said that, “On its face, it appears that this agreement takes a balanced approach to ensuring that Connecticut meets its long-term obligations while better adjusting to changes in the market. I look forward to fully studying the agreement before commenting further.”

Workers’ benefits, deductions don’t change
 
 

 

Carmen A. Roda

President

Judicial Professional Employees 

One Union One Voice

 

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