Grappling with the gorilla
State’s pension liabilties second-highest in nation after being ignored for decades
It’s the $800 billion to $100 billion gorilla.
Connecticut’s pension liabilities are the second-highest, per capita, in the nation, nearly 16 percent of the two-year, $40 billion state budget.
On an average state resident’s income tax bill of $4,885 this year, $767 went for teacher and unionized state employee pension contributions.
The liabilities accumulated over decades, as governor after governor, empowered by lawmakers on both sides of the aisle, ignored the problem. Even during times of robust, billion-dollar surpluses, state leaders did not address an underfunding so severe that it has now put Connecticut on desperate financial ground. “Obviously, if there was an easy answer here it could have been done a long time ago,” said Joe Brennan, president and CEO of the Connecticut Business & Industry Association, the state’s largest business group
and a major force in the state Capitol. “Our hands are tied, to a degree. We’re not suggesting punishment for anyone, one way or the other, but pensions are the cost-drivers of deficit.”
The three leading candidates for governor, Democrat Ned Lamont, Republican Bob Stefanowski and the unaffiliated Oz Griebel, have starkly different proposals to grapple with the gorilla.
Lamont, a small business owner-turned investor, wants to use his labor union endorsements to coax them back to the negotiating table, and collaborate on a third major round of concessions since 2011.
Stefanowski, a consultant and former international corporate CEO, would demand union givebacks, threatening to take them to court to nullify the contracts.
Griebel, a former Hartford business leader who is far behind in the polls, thinks the best thing would be to postpone about $5.5 billion in required annual contributions for the teacher and state-employee funds over the next two years, to provide some fiscal “breathing room.”
Decades in the making
The problems of the state Teachers Retirement System and the State Employees Retirement System date to the 1980s.
In 1983, under Democratic Gov. William A. O’Neill, the recommended contribution for funding teachers’ program was about $240 million. The state invested $97 million.
In 1997, with John G. Rowland, a Republican, in the governor’s office, $180 million was needed, but only $148 million was put into the fund.
In 2005, under Republican Gov. M. Jodi Rell, $281 million was required, but the state put in $188 million. In her last three years in office, Rell fully funded the obligations.
Under Gov. Dannel P. Malloy, the pensions were fully funded every year. But the accumulated obligations had done their damage and he entered office in 2010 with a monumental challenge.
A stark difference
Stefanowski and Lamont want to rework employee contracts, but they offer different styles.
Lamont, who has been endorsed by the unions, wants a partnership to explore what can be done for savings.
“Everybody blames the teachers and that’s absolutely false,” Lamont said. “That teacher who has been working for the state for 20, 30 years and now is 70 years old and is retired, and she went to work with an agreement, a handshake and a contract. And the fact that governors on both sides of the aisle didn’t put a dime in that pension going back to the ’70s and ’80s is not her fault.”
Connecticut needs to assure future state employees that benefits will be available to them, he said.
“It may be a mix of defined contribution and defined benefit,” Lamont said. “You’re not going to do it by tearing up the contract and saying ‘Take me to court.’ I think you’re going to do it by looking that teacher in the eye and saying I can’t think of another way that I can solve this crisis.”
Stefanowski is willing to challenges the unions legally, if he has to.
“We must renegotiate SEBAC,” Stefanowski said. “We have to do it. It’s choking this state. We have to do it fairly and protect existing retirees, if we can. That agreement is going to tear down this state if we don’t do something with it.”
Touting his experience negotiating as a business executive, Stefanowski said he must deal from a position of strength.
“When you negotiate you need a credible threat,” he said. “And to me the credible threat here is to exercise the sovereign powers of the state and to bring it to the courts. I would hope we wouldn’t have to do that. I’ll come in and try to be fair with people, but we could do it the easy way or we could do it the hard way.”
Griebel, the independent candidate facing long odds against his election, said that with a projected $4.5 billion deficit in the next two-year, $40 billion budget, the choices are hard.
He proposes taking the state’s emergency reserves to help fund state services, or just skipping the payments.
“We’re talking about potentially not contributing to the state employee or teachers retirement fund for two years to give us some breathing room,” Greibel said during a campaign event.
“I think what’s getting lost in all of the discourse is that state employees and unions have made substantial sacrifices, both now and in the long-term to help stabilize the pension system and also reduce the state budget deficit.”
Larry Dorman, public affairs coordinator for AFSCME Council 4
Some recalibration
Twice during his tenure, Malloy persuaded the nearly 50,000 unionized state workers to agree to new concessions.
In 2017, he got the union to agree to wage freezes, furlough days, higher health insurance co-pays, an increase in pension contributions from 2 percent to 4 percent in exchange for a four-year, no-layoff provision and a contract extention to 2027.
In the process, the unions agreed to a new tier of defined pensions contributions, instead of defined benefits, for new employees. Together the changes could save the state up to $500 million annually said Larry Dorman, public affairs coordinator for AFSCME Council 4, which represents about 15,000 state employees.
The governor proposed making towns and cities pay for a share of their local teacher retirement plans, but leaders of the General Assembly rejected the politically sensitive idea.
Looking ahead
The use of state assets, such as the Lottery or sale of state-owned property could be part of the solution, the business group leader Brennan said.
“Is it possible through negotiation to make some changes to slow down the growth rate,“Brennan asked. “The big sticking point is that some of the structural changes that need to be made for a long-term solution are very problematic because of the contracts.”
There may not be much the next governor can do right away, Brennan admitted. Removing overtime from pension calculations would help, but it is part of the contracts. Creating still another tier for new workers is unlikely to create much more savings.
Dorman, the union leader, said there are other, obvious, solutions.
“I think what’s getting lost in all of the discourse is that state employees and unions have made substantial sacrifices, both now and in the long-term to help stabilize the pension system and also reduce the state budget deficit,” Dorman said. “The average giveback is $17,500 per state employee, so that’s 1.5 percent of population solving almost 30 percent of the current budget deficit.”
While some higher-paid former executive level state employees do make sixfigure pensions, he said most retirees, including former clerical staff, get modest pensions of up to $20,000 a year. It’s those with the longest state service, the Tier I employees of which there are about 1,500, who drive up the overall average pension payouts.
“The debate has to move from blaming dedicated middle class employees, to revenue and taxation,” Dorman said, adding AFSCME endorsed Lamont. “The ultra-wealthy and corporations are benefiting from this tax system. This seems to be getting lost as the candidates have been trying to whip people into a frenzy against state workers.”