CT pensions hit $55B, but debate rages over how we stack up
How happy should we be about the state of Connecticut’s improved pension funds? A deep discussion at the state Capitol Tuesday involving a Yale professor who’s the leading critic of the funds and the state Treasurer brought that question to life.
On its face, the news looks great compared with where we’ve been. Connecticut’s pension funds hit $55 billion at the end of 2023, a year that saw a total investment return of 12.8%. That placed the funds “among the top 27% in the nation,” Treasurer Erick Russell announced last week.
And of course, the first quarter of 2024 is shaping up nicely with a run-up in the shares of U.S. companies.
This matters to all of us because, at $55 billion, a 1% swing in fund performance equals $550 million, larger than the much ballyhooed state tax cut we’re seeing this year, larger than the urgent funding demands from state colleges and universities, public schools and human service providers combined.
The pensions were funded at 58% of their long-term needed levels as of Dec. 31, according to a report by Equable, a private group. That’s fourth from the bottom among states but ahead of where we were just a few years ago. Connecticut has poured an extra $7.7 billion of budget surplus money over the last four years into the funds for state employees and teachers, on top of the improved returns and on top of the required deposits.
“This is the highest funded ratio that we’ve had for many years,” Treasurer Erick Russell told the legislature’s finance committee Tuesday. “What this is doing is saving taxpayers hundreds of millions of dollars a year.”
He added that over 10 years, Connecticut’s pension returns are now in the top 40% among public retirement funds. And he described reforms his office has undertaken on several fronts — a major readjustment of the asset mix in the funds; a stronger advisory board; measures to attract and retain in-house fund managers; and a paring of outside money managers that until recently numbered over 100.
“It’s not where we need to be and there certainly is more room for improved performance,” Russell told the committee.
Top half or near the bottom?
That top 40% figure would seem extraordinary. Less than a year ago, in May 2023, four months after Russell took office, a Yale professor and adviser to Gov. Ned Lamont dropped a bombshell: Connecticut’s pensions had performed so poorly that only one state fared worse in the five years ending June 30, 2022; and only four states had lower returns in the 10 years ending on that date.
Too extraordinary to be true as a comparison of states, as it happens. Jeffrey Sonnenfeld, the Yale School of Management professor, and Steven Tian, research director at the Chief Executive Leadership Institute, which Sonnenfeld heads, delivered an update Tuesday.
Their findings: Through June 2023, the Connecticut pensions had indeed fared better but were still in the bottom 10 among all 50 states over the prior 10 years, leaving Connecticut billions of dollars behind where it would be if it only reached the middle of the pack.
No matter how well the Connecticut pensions fared in the latter half of 2023, they didn’t climb from the bottom 20% to the top 40% in 10-year returns. That math can’t happen.
As it happens, Russell’s comparisons were not with other states, but rather with a group of some 70 public pension funds of all kinds, with more than $1 billion in assets. Sonnenfeld and Tian, strongly preferring a state-to-state comparison, brought plaudits for Russell and the Treasurer’s office but on that point — and several others — sharp criticism.
“He’s had a fantastic first year . ... We congratulate him and Ellen Shuman,” Sonnenfeld, a former co-chairman of AdvanceCT, the state’s business recruitment arm, said of Russell and the chair of the state’s investment advisory council.
Sonnenfeld added, to the finance committee, “I wouldn’t say ‘mission accomplished’ just yet, but I wouldn’t have anticipated we would be where we are.”
‘We have changing goal posts’
Having heaped praise for the start of a turnaround, the professor, probably the nation’s most quoted expert on corporate leadership and CEO culture, launched into a fusillade of barbs about how the Treasurer’s office is enacting its reforms. In a 9-point plan, he and Tian called for clearer reporting, speedier weeding out of poorly performing asset managers and more consistency in the allimportant benchmarks the state uses to measure its performance.
“We might stand uniquely alone as a state that actually pays money on money that is not being managed, just parked in the bank,” Sonnenfeld said. “Nobody else does that.”
While Russell said the ranks of outside managers have been pared down, Sonnenfeld wants to see names. “We have people that are feasting off the state,” he said.
“We have people with us who have been with us for over a quarter of a century and they are not performing well.”
The benchmarks seem like inside baseball and they are, but they matter because changing them around gives the Treasurer’s office license to claim success in its results, almost no matter what.
I and a lot of other folks including members of the General Assembly’s finance committee have let ourselves become victims of this over the years. We duly noted year after year of results that beat one or another benchmark — but were, in the end, poor returns. We should have known that.
“Ironically the public employees would have done better on their own,” Tian said, with a typical mix of stocks and bonds.
Sen. John Fonfara, D-Hartford, longtime co-chair of the finance committee, conceded that he focused on the money coming in and out of the funds over the years, but not the investment returns.
“I can’t help but wonder, where was the investment advisory council during that time, these folks that are supposed to be the watchdogs,” Fonfara asked, speaking about what we now see in retrospect as a missed opportunity to invest in private equity and credit markets.
“I can’t speak to everything that happened prior to me being here,” Russell responded. “We’ve got some great committed public servants that have put a lot of effort into this work.”
Sonnenfeld was blunt, slamming “arbitrarily selected, obscure financial benchmarks” that are still in use.
“We can show you, it isn’t just an issue of apples to apples. We have fruit juice going on. We have apples and oranges jumbled together in the same funds. We have changing goal posts,” he told the committee. “We should just use standard criteria and keep it consistent the way others do.”
Clearer metrics along with better returns
An exchange between Sen. Ryan Fazio, RGreenwich, and Russell and his chief investment officer, Ted Wright, was telling. Fazio, co-author of one of the treasury reform bills last year, offered praise for the job they were doing but asked why they use a benchmark for global stocks but only U.S. bonds.
Wright countered that if the office did it Fazio’s way, “we actually would look a lot better . ... I think our equities portfolio, just U.S. equities, is a top-10 performer.”
Fazio doesn’t like the fact that Connecticut and only one other state, North Carolina, have “sole fiduciary” treasurers, meaning they have ultimate power to make investment decisions and overrule advisory boards; not that Russell is doing that.
Fazio drilled into the comparisons to other pension funds, citing that top-27 percent claim. “I assume that’s because you’re counting a lot of municipalities’ pensions,” he said. “Why not simply count Connecticut among other states?”
“There are no comparisons against municipalities,” Russell said.
Sonnenfeld later showed the list of funds in the comparison group, revealing that more than two-thirds were municipalities — an innocent mistake by Russell —and he asked the committee members whether any of them did not think the 27% claim was against states.
“We’re asking the questions here,” Maria Horn, D-Salisbury, the co-chair, quipped.
What matters most is the results and those are moving in the right direction. But we do need to get the metrics right and not with the hundreds of pages of dense material that Sonnenfeld said even he and Tian had trouble wading through. The finance committee could move a bill calling for clearer comparisons, perhaps produced by the legislature, a proposal Russell’s office has not yet reviewed.
“We want to be helpful. If somebody wants any specific explanation or more data ... We are exceptionally easy to find,” Tyler Van Buren, spokesman for the office, said late Tuesday.
He added that simple, state-to-state comparisons can gloss over differences in the ways states report results. Different measures do have value, he said.
And as Tuesday’s back-and-forth showed, there’s no singular, clear and easy way to measure the performance of a $50 billion-plus set of funds.
Van Buren and Russell both credited the work of Sonnenfeld and Tian and their recommendations, some of which were, and some were not, already underway.
The bottom line: Things are a lot better than they were and more improvements in the way the funds are managed will come.
Said Russell, “My goal is ... to make sure we build this out for long term success.”