Six years later, pension problem persists

Connecticut faces the tough mathematical reality that those obligations will continue to demand an ever-larger piece of the budgetary pie.

In 2014, The Day published a special report documenting the deep hole in which Connecticut found itself, burdened by pension systems for state workers and teachers that were among the country's most underfunded. Six years later it would be great to report that the situation has vastly improved. It hasn't. There has been some progress, but Connecticut still faces choosing from among a set of bad options.

Connecticut is no longer digging the hole deeper. Each succeeding generation of state workers has, through negotiations, agreed to settle for less. Benefits negotiated during the prior administration of Gov. Dannel P. Malloy call for a hybrid system for new hires. It makes these state employees partially responsible for saving for their own retirement, combining fixed benefits with a 401k style plan. It is a sustainable approach for the state.

The bad news is that it does not address the legacy problem — generous pension deals negotiated by governors and OK'd by legislatures who left it to their future counterparts, and the taxpayers, to figure out how to pay for them. Through the 1940s, 1950s and 1960s Connecticut saved nothing to pay for the pensions it was contractually obligated to provide. And even throughout the 1970s and well into the 1980s, the savings set aside fell far short of what actuaries were telling state officials were necessary.

Thereafter the legislature got more serious about setting aside money to meet pension commitments, but even then the requirements would be ignored when a budget had to be balanced and tax increases or spending cuts were not judged politically attractive. It was not until after Malloy's election in 2010 that the state baked into the budget process the pension contributions.

Now Connecticut faces the tough mathematical reality that those obligations will continue to demand an ever-larger piece of the budgetary pie, either requiring tax increases or reducing resources for social safety net programs, and probably both.

A 2015 analysis requested during the Malloy administration concluded that by the early 2030s, now not so very far away, the annual contributions to underwrite the state worker and teacher pension plans would reach $12 billion annually, this in a state where the current state budget, in total, is only $21 billion. While some have characterized the analysis by the Center for Retirement Research at Boston College as overly pessimistic, even an obligation of $8 billion — one-third lower than projected — would still be unsupportable.

In 2017, Malloy persuaded the legislature to approve a relatively small refinancing of the state employees' pension fund to keep the annual obligation manageable. We supported that adjustment.

Earlier in his term — before the pandemic largely ceased legislative action — Gov. Ned Lamont proposed a far more aggressive refinancing plan. He suggested restructuring the state's pension contributions over 13 years to save about $9 billion, providing an initial savings and then climbing by 3 percent to 4 percent annually through 2032, but remaining far more manageable than current projects. A second restructuring would have carried Connecticut through 2050.

That sounded good until you considered what shifting the obligations out that far would mean in increased interest charges — an extra $27 billion obligation over the long term to save that $9 billion, according to the reporting of Keith M. Phaneuf at the Connecticut Mirror back in 2019.

Ultimately, in 2019, Lamont struck a cautious refinancing deal with the labor unions to save the state about $272 million over the course of two fiscal years and provide some small fiscal breathing room. It made no changes in pension benefits.

Since those discussions, the governor and the state have otherwise been preoccupied, but the problem has not gone away and must be addressed.

Our expectation is that further refinancing can be part of the solution, but is not the entire solution. Post-election, Gov. Lamont should renew talks with state labor unions and the legislature. If a tax increase is tapped to help, it must be dedicated for pension needs. And state pensioners should be ready to take a modest haircut or risk losing their pension payments, or some portion of them, if the system goes bankrupt.

This problem is every bit as big and difficult as our 2014 investigation suggested. But Connecticut has no choice but to solve it.