New Haven Register (New Haven, CT)
Lamont: Surplus to backstop teacher pensions
Gov. Ned Lamont wants to use the state’s projected $380 million budget surplus to support a major change in the troubled teacher pension program, and avoid a multibillion-dollar liability coming up in 2025.
The proposal the governor developed with State Treasurer Shawn Wooden is projected to save $2.8 billion over the next five years for the system, which has about 37,260 retirees and 50,000 active teachers.
After Lamont announces the initiative in today’s budget address, it will require approval of both the General Assembly and the Teachers’ Retirement
Board, which oversees the under-funded pension plan.
“We need to think about these long-term obligations as we would a mortgage,” Lamont said in a statement Tuesday. “You wouldn’t pay off your mortgage in a decade, and Connecticut shouldn’t try to do the same with its pension obligations. Stretching out our payments over a longer period of time will allow us to avoid market volatility and bumps, and provide the breathing room to make critical investments in workforce and economic development, transportation, and education so we finally get Connecticut growing again.”
About $381 million of January’s estimated $462 million surplus in the fiscal year that runs through June 30 essentially would backstop the retirement program, assuring bond holders of their principal and interest.
“I think it’s a reasonable thing to do,” said Senate President Pro Tempore Martin M. Looney, D-New Haven. “I think we now have a situation where current projections show we would have more than that in surplus at the end of the year.”
In addition, Lamont will ask that net revenues from
the Connecticut Lottery Corp., projected at $371 million next year and more than a half-billion dollars by 2032, also would be available to support what would become the new Teachers’ Retirement Fund Special Capital Reserve Fund.
Wooden said Tuesday that he expects the lottery revenue would not be needed, and could flow into the General Fund as usual. It’s just additional support for bondholders, he said.
Lamont’s plan also includes lowering the assumed rate of return on investments from the current 8 percent to 6.9 percent. The average retirement age for teachers is 63. About 1,000 teachers retire each year, with annual benefits of $51,657, according to the Teachers’ Retirement Board.
Wooden expects the retirement board to approve that attempt to reduce expectations, while increasing payments from teachers over five years. The trap of higher rates of expected return has troubled pension programs throughout the nation, he said.
Wooden warned that projections vary, but within three to four years, certainly by 2025, the projected
$2.8 billion “spike” could cripple the retirement plan. “This avoids that spike, levels off those payments for the duration and by doing so, gives us more predictability and flexibility for which credit-rating agencies have been critical in the past,” Wooden said.
Wooden said the current 12-year repayment period on bonds issued in 2008 would be stretched out to 30 years, stabilizing payment requirements through a process called reamortization. The state would save $183.4 million and $189 million over the next two years in the new fund, aimed at supporting unfunded liabilities.
“The savings in net present value is $2.8 billion,” Wooden said. “When you restructure debt or extend it, there is an increased all-in cost. In looking at the transaction as a whole, it’s going to cost more. At long last, this more realistic investment return assumption will be in sync with the pension funds’ strategy for investing without taking an undue risk.”
Lamont’s proposals include changes in the retirement fund for state employees, including future cost of living adjustments based on market returns of between one and 3 percent. That would have to be negotiated with state employee unions. Lamont also will ask for the elimination of mileage reimbursements in pension calculations.
The State Employees Bargaining Agent Coalition, in reaction to Lamont’s statement, said Tuesday night they have given back enough.
“By agreeing to hard wage freezes, reduced pension and health care benefits, higher employee contributions and higher premium share costs, our members have done far more than their fair share to improve Connecticut’s fiscal health,” the group, representing 15 major state unions, said in a statement. “Our latest agreement in 2017 will save taxpayers $25 billion over the next 20 years. To be clear; we will not be part of asking for still more sacrifices from state employees, who have already given so much for the people they serve.”
Lamont recently released several key points of planned structural changes, including an expanded sales-tax base, including new proposed taxes on digital downloads and streaming TV such as Netflix.
“We are anticipating a $3.7 billion budget deficit over the next two years, with additional deficits on the horizon,” Lamont said. “Taxpayers are tired of hearing this year after year, and rightfully so. This is the ‘Land of Steady Habits,’ but we can’t continue along the same path and expect that things will fix themselves. Our state needs to make real, substantive structural changes to facilitate a sustainable financial future.”