Pen­sions will sink Con­necti­cut

With­out a ‘1983’ mo­ment like Rea­gan, Congress had on So­cial Se­cu­rity

The Register Citizen (Torrington, CT) - - OPINION - Joe DeLong is the ex­ec­u­tive di­rec­tor of the Con­necti­cut Con­fer­ence of Mu­nic­i­pal­i­ties.

The Con­necti­cut Con­fer­ence of Mu­nic­i­pal­i­ties (CCM) is keenly aware that pub­lic pen­sions are rapidly drain­ing the vi­tal­ity of our state. Our large cities are drowning in un­funded pen­sion li­a­bil­i­ties; seven cities have to pay off about $900 mil­lion in pen­sion obli­ga­tion bonds. An­nual re­quired con­tri­bu­tions to more than 200 lo­cal plans are crowd­ing out needed in­vest­ments in ed­u­ca­tion and in­fra­struc­ture. With lo­cal bud­gets heav­ily de­pen­dent on prop­erty taxes, it’s im­pos­si­ble to talk about prop­erty tax relief with­out ad­dress­ing pen­sion li­a­bil­i­ties.

It’s no dif­fer­ent at the state level, where the prob­lems of the Teach­ers’ Re­tire­ment Sys­tem (TRS) and State Em­ployee Re­tire­ment Sys­tem (SERS) have been widely pub­li­cized. CCM re­cently formed a Pen­sion Li­a­bil­i­ties Task Force, and that group has been qui­etly meet­ing, gath­er­ing in­for­ma­tion, work­ing with our con­sul­tant and ex­plor­ing op­tions. We sus­pect as­set trans­fers, ded­i­cat­ing lottery pro­ceeds to pen­sions, or ex­tend­ing amor­ti­za­tion pe­ri­ods will only blow holes in other parts of the bud­get and push more li­a­bil­i­ties to fu­ture gen­er­a­tions. THERE ARE NO EASY SO­LU­TIONS!

We des­per­ately need hon­est, tough dis­cus­sions, just like the 1983 ne­go­ti­a­tions be­tween Pres­i­dent Rea­gan and Congress on So­cial Se­cu­rity. Back then, we knew that un­funded le­gacy li­a­bil­i­ties had left So­cial Se­cu­rity ba­si­cally broke and an even bleaker fu­ture loomed when Baby Boomers re­tired. The even­tual com­pro­mise in­creased con­tri­bu­tions from em­ploy­ees and em­ploy­ers, phased in longer work­ing ca­reers, and made nu­mer­ous other changes. Ba­si­cally, Baby Boomers funded the le­gacy li­a­bil­i­ties and their own fu­ture re­tire­ments.

At state lev­els, Wis­con­sin made hard choices in the 1970s, merg­ing its state and lo­cal plans, de­vel­op­ing risk-shar­ing, and cre­at­ing a modern pen­sion sys­tem. To­day, Wis­con­sin cal­cu­lates li­a­bil­i­ties with a 5.5 per­cent dis­count rate (lower than any other state uses); it main­tains roughly 100 per­cent fund­ing; it dis­trib­utes CO­LAs to re­tirees based on mar­ket per­for­mance; and it keeps con­tri­bu­tion rates at 13.2 per­cent (shared by em­ploy­ees and em­ploy­ers).

Ev­ery other state, in­clud­ing Con­necti­cut, has avoided hard choices on pen­sions.

Our state and (some) lo­cal plans have em­ployed an ar­ray of ac­tu­ar­ial tech­niques to keep an­nual con­tri­bu­tions as low as pos­si­ble and push re­quired con­tri­bu­tions onto fu­ture gen­er­a­tions. Con­stant news re­ports chron­i­cle the de­par­ture of our cit­i­zens for lower tax en­vi­ron­ments. Fac­ing ev­er­in­creas­ing taxes and no global so­lu­tion to our pen­sion co­nun­drum, they are sim­ply de­clin­ing to pay for those decades-old de­ci­sions.

Here’s some re­ally bad news: The long-term in­vest­ment cy­cle may have caught up to us. Re­cent pro­jec­tions from Van­guard (with more as­sets un­der man­age­ment than all Amer­i­can pub­lic pen­sion plans com­bined) de­clared that “our ex­pected re­turn out­look for U.S. eq­ui­ties over the next decade is cen­tered in the 3-to-5 per­cent range, in stark con­trast with the 10.6 per­cent an­nu­al­ized re­turn gen­er­ated over the last 30 years.”

If th­ese pro­jec­tions prove rea­son­ably ac­cu­rate, our pub­lic pen­sions are toast, with TRS re­quired con­tri­bu­tions de­stroy­ing the state bud­get within six years.

CCM’s Task Force has de­bated op­tions such as merg­ing the 206 lo­cal plans with the Con­necti­cut Mu­nic­i­pal Em­ployee Re­tire­ment Sys­tem (CMERS). Well-funded lo­cal plans would want some­thing in re­turn, such as as­sur­ance that the large state plans would be sta­bi­lized and in­come taxes wouldn’t be raised. Merg­ing all state and lo­cal plans would pro­duce a Wis­con­sin-like fund with at least $40 bil­lion in as­sets — enough to make low in­ter­est loans to wa­ter sys­tems to meet the $8.6 bil­lion civil en­gi­neers es­ti­mate is needed for drink­ing wa­ter and waste­water treat­ment over the next 20 years.

Pub­lic en­ti­ties in CMERS were re­cently no­ti­fied by The State Re­tire­ment Com­mis­sion that it is low­er­ing the long-term ex­pected re­turn on as­sets as­sump­tion from 8.00 per­cent to 7.00 per­cent, which will lead to an im­me­di­ate in­crease of 15to-20 per­cent in mu­nic­i­pal em­ployer con­tri­bu­tions. With­out changes to CMERS, the cur­rent sys­tem is

If th­ese pro­jec­tions prove rea­son­ably ac­cu­rate, our pub­lic pen­sions are toast.

un­sus­tain­able for par­tic­i­pat­ing en­ti­ties and will put even more pres­sure on an al­ready stressed prop­erty tax sys­tem.

We hope Gov. Ned La­mont will charge a larger task force of stake­hold­ers to create a shared risk pen­sion model and a tran­si­tion plan. CCM is ready, will­ing and able to share some con­crete so­lu­tions with the gov­er­nor and stake­hold­ers, as ad­dress­ing pen­sion li­a­bil­i­ties must be the top pri­or­ity in re­solv­ing Con­necti­cut’s fis­cal cri­sis.

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