Conn. braces for market downturn
As Connecticut continues to chip away at a state debt load among the highest in the country, states nationally could see their debts balloon this year as a result of the swooning stock markets, according to a new study.
The advocacy nonprofit Reason Foundation is warning of a possible average return for state pensions of negative 6 percent for the 2022 fiscal year that ended last month, based on market declines in this calendar year. That would push unfunded liabilities above $1.3 trillion across nearly 120 plans charged with safeguarding state pensions.
Connecticut’s pension funds, in that scenario, would go from an unfunded total of $37.6 billion, or 53 percent funded, to an unfunded total of $43.2 billion, or 48 percent funded, according to the rightleaning Reason Foundation, which has offices in Los Angeles and Washington, D.C.
The 53 percent has Connecticut tied with Kentucky for the worst funded pension liability load in the nation, with New Jersey third worst at 55 percent. Connecticut’s shortfall is due to governors and legislators of both parties systematically shortchanging pension contributions over many years until former Gov. Dannel P. Malloy took office in 2011.
At the other end of the table, New York trailed only Washington and Wisconsin for the best profile, with all of New York’s outstanding pension obligations funded with a $46 billion surplus to help absorb any prolonged slump in the stock market.
Last Wednesday, the administration of Gov. Ned Lamont announced $4.1 billion in transfers from the state budget for the fiscal year to reduce unfunded liabilities, above and beyond the roughly $3 billion required by formulas. Coupled with smaller extra payments in the prior two years, the Office of Policy and Management calculated the added payments would save taxpayers about $500 million a year for 25 years, or about $12 billion total.
Earlier this month, Lamont said he was bracing for the impact of the market decline on Connecticut’s financial obligations, coupled with the likelihood of an economic recession impacting tax collections. The Dow Jones Industrial Average was off 12.9 percent on the year as of Monday afternoon, with the more volatile Nasdaq down by 26 percent.
Lamont said the state’s “rainy day” fund, now at its $3.3 billion cap under the law, gives the state one option to keep up with its goals for trimming overall debt and obligations.
“Over the last 30 years our fixed costs have been growing, accelerating, eating up more and more of the operating expenses,” Lamont said during a Hartford press conference on July 7. “Previous administrations just added to the credit-card debt and hoped that somebody would pay that off — it’s like a game of Pac-Man eating up more and more of the budget. We have a long way to go but we have begun bending that curve.”
Lamont said the state has focused during his three years in office on paying down pension obligations, having shaved $11.5 billion through additional contributions to the State Employees Retirement System and the Teachers’ Retirement System.
Fitch Ratings gave an “AA-” rating in May to Connecticut’s newest issue of general obligation bonds, on the lower end of its second tier “very strong capacity” for repayment even taking into account the possibility of a recession and market fluctuations. Fitch Ratings is a New York-based subsidiary of Hearst Corp., which owns CTInsider and Hearst Connecticut Media Group,
“The state has consistently demonstrated the ability to cover its comparatively high fixed costs, including making full actuarial contributions to pensions,” Fitch analysts wrote in their May assessment. “The state’s long-term liability burden is elevated and among the highest for U.S. states, but still considered moderate relative to personal income.”