CT Gov Ignores Long Term Fiscal Problems

Zachary Janowski writes:

Gov. Dannel Malloy signed a new budget into law last week, putting in place a framework for solving Connecticut’s projected $3.5 billion deficit, but the state still has long-term financial challenges it needs to face.

Malloy’s budget hinges on the ability of his administration to get $1 billion in concessions from state workers in each of the next two years – or to find another way to fill that gap through layoffs and other cuts.

One possible area for savings is public employee pensions and retiree health care. These costs contribute to the short-term deficit faced by the state, but they drive Connecticut’s long-term fiscal challenges.

In 2010 the state contributed $1.8 billion to cover retiree health and pension costs, according to the 2010 Comprehensive Annual Financial Report.

Unfortunately, the $1.8 billion contribution in 2010 was $2.1 billion less than the cost of those benefits, according to the CAFR.

In other words, the state promised $3.9 billion in retirement benefits to its employees last year, but only set aside $1.8 billion to pay for them.

This deficit adds to the accumulated deficits of previous years, with the state’s three main pension funds now behind by $20.8 billion, up $5 billion since the last estimate in 2008.

In addition to providing retirement benefits to state employees, Connecticut also provides health insurance and pensions to public school teachers who don’t work for the state.

The unfunded liability for healthcare costs is even larger. The state is behind $3 billion for teacher healthcare costs and $26.6 billion for state employees.

To put the annual cost of retirement benefits into perspective, the $3.9 billion in promised benefits exceeds the $3.3 billion the state paid in salary last year.

That’s more than 97 times the cost of longevity payments each year or the rough equivalent of giving longevity payments four times a week instead of twice a year.

If each Connecticut resident had to pay an equal share of the benefits promised in 2010, the bill would come to $1,115. The contribution the state actually made amounted to $517 per person.

The state is responsible for the majority of pension costs. For every dollar state employees contributed to their pension fund last year, the state paid nearly 11 ($66 million vs. $721 million).

In 2010, Connecticut’s contributions for retirement expenses amounted to 8.7 percent of the budget. For the current year, the state’s contribution is estimated at 9.6 percent. For the next two years, the state will put 11.2 and 11.4 percent of its budget toward retirement costs.

And if the state wanted to fully fund its pensions, it would have had to contribute even more.

Most state employees hired between 1984 and 1997 contribute nothing toward their pension. Employees hired since 1997 pay 2 percent of their salary, while those on hazardous duty pay 4 or 5 percent.

According to the Commission on Enhancing Agency Outcomes, only seven states require employees to contribute 2 percent or less (Appendices, p. 122).

The commission estimated the average state employee retirement package to be worth $22,353 per year, nearly 10 times the value of average private sector retirement benefits ($2,990).

Connecticut is not alone in facing deteriorating pension systems, according to The Widening the Gap, a report by the Pew Center on the States. Across the country, states have $1.26 trillion in long-term unfunded liabilities for pensions and retiree healthcare.

The Pew report ranks Connecticut near the bottom on funding its retirement obligations. The state is responsible for 4 percent of the nationwide unfunded liability, while it accounts for 1.6 percent of the national economy.

Connecticut’s long-term unfunded retirement liabilities add up to $50.4 billion, the equivalent of one-fourth of the state’s annual economic output or 2.5 years of state spending.

“The Malloy administration is well-aware of the unfunded liabilities facing the State and the potential negative impacts on our ability to grow the economy,” said Gian-Carl Casa, a spokesman for the Office of Policy and Management.

“That is why we have made the fiscal health of the State a priority – so that we can, in a transparent and comprehensive fashion, live within our means and address those liabilities,” Casa said. “That is why business leaders endorsed the Governor’s budget.”

According to critics of the underfunding of public pensions, the large unfunded liabilities point to the need for change in the way Connecticut and other states pay for retirement benefits.

“Pew’s numbers show that Connecticut’s pension system is not on solid footing,” said Eileen Norcross, a senior research fellow at the Mercatus Center. “The pension system is not sustainable and will require some structural policy changes, namely increasing contributions, making the full annual payment, reducing benefit accrual rates, closing the defined benefit system and moving to a defined contribution system, and possibly freezing or reducing the [cost of living adjustments] in order to meet its obligations over the coming years.”

“The public sector is now belatedly confronting the economic realities which the private sector began confronting many years ago, i.e., the un-sustainability of pension and retiree medical programs fashioned for a different world,” said Edward Zelinsky, a New Haven resident and professor at Yeshiva University’s Cardoza School of Law. His book, The Origins of the Ownership Society, recounts how defined-contribution plans have come to replace traditional pensions.

Unfortunately, Connecticut’s liability is only growing because each year the state fails to put aside enough money to fully pay for its new promises.