Generous state worker benefits? That’s for sure!

In 2015, the Malloy administration commissioned a study of Connecticut’s State Employees Retirement System (SERS) by the Center for Retirement Research, a prominent pension research institute. While the Center’s report was well done and most of its recommendations were adopted by the state, the Center miscalculated the level of employee pension benefits, saying they were not “overly generous.” They were and, today, still are overgenerous.

The Center’s error has distorted subsequent debate about state employee compensation, the origins of the drastic underfunding of SERS, and the high cost to the state of pension benefits, as the state’s annual contribution to SERS escalates inexorably.

The Center stated that “The main cost driver for SERS is the unfunded liability from legacy costs and funding shortfalls, not overly generous benefits to members (employees and retirees).”

The statement is correct, except that many state employee union supporters and apologists have misinterpreted it to say “The only cost driver for SERS is the unfunded liability from legacy costs and funding shortfalls…” That is not correct.

Misinterpretation is understandable in light of another statement by the Center “the cost of benefits provided to current employees (the total normal cost) is actually below (the national) average for similar plans.”

This second statement was erroneous. It relied upon analysis which glossed over the key question of who bears “the cost.” The cost of benefits is borne both by the state and by employees who contribute to their own pensions.

Because Connecticut employees contributed so little to their own pensions, the cost to the State of Connecticut was actually higher than the average cost of pension benefits in the 50 states.

Here are the numbers from the Center’s study (page 17). In 2014, the State of Connecticut contributed 8% to SERS, while the 50-state average state contribution was 7%. These percentages are pension cost as a percent of payroll cost.

Connecticut state employees contributed only 2.2% to their own pensions, while the 50-state average employee contribution was triple that amount, or 6.6%.

Either way you interpret “generous” — from the state perspective or from the employee viewpoint — Connecticut employee pension benefits were overly generous.

Connecticut was “generously” paying 1% more than other states. Connecticut employees were receiving 1% more, since they were contributing just one-third of what state employees were in other states.

Instead of recognizing this distinction, the Center glossed over it and only looked at the gross unallocated cost of pension benefits, namely 10.2% in Connecticut versus an average of 13.6% in the 50 states. This creates an illusion opposite to reality.

The fair and accurate measure is net cost for the state and net benefit for employees, which, in Connecticut, was 8% (the gross unallocated cost/benefit of 10.2% less employee contributions of 2.2%). The national average was 7% (13.6% less 6.6%).

The Center stated at the outset of its study that SERS was only 42% funded in 2014, “among the lowest in the nation.” A state with a severely underfunded pension fund should not be bearing a higher-than-average cost to provide its employees more generous pension benefits than states with better-funded pensions.

Yet Connecticut has been doing exactly that, with the consequence that SERS remains amongst the lowest funded pension funds in the nation, and with the further consequence that the pension cost for the state increases every year, both absolutely and as a percent of the state’s overall budget.

And pension benefits are not the only element of “generosity” in Connecticut. State employees enjoy better wages and more robust health care benefits than state employees in the other states. It should be noted that Connecticut’s higher wages skewed the results of the Center’s pension benefits analysis. With pension benefits measured as a percent of wages (“payroll”), Connecticut’s higher wages made its pension benefits appear to be lower, or less generous.

However, the larger issue is total compensation. There have been five studies of total state employee compensation in Connecticut. The first was an internal study by the state in 2010. Yankee Institute commissioned studies of Connecticut in 2015 and again in 2020. Finally, the American Enterprise Institute carried out two studies comparing all 50 states, the first in 2014 and the second in 2019 (covering both state and municipal employees).

All five studies compared state employee compensation to private sector compensation. In all five, Connecticut state employees earned from about 30% to over 40% more than the state’s private sector employees, the highest gap in the nation. That is both unfair and unsustainable.