14,000 state employees to pay for pension investment losses

More than 14,000 Connecticut state employees hired since 2017 will have to pay 2 percent more toward their pensions next fiscal year, which begins on July 1, 2023, according to a memorandum sent by the Office of the State Comptroller.

The reason is the poor performance of Connecticut’s pension funds over the 2022 calendar year, which saw a negative return of 10.85 percent. The State Employee Retirement System (SERS) assumes a market return of 6.9 percent but missed the mark in a big way following a difficult year on Wall Street.

The increased contributions due to poor market performance were part of the Tier IV hybrid plan, passed as part of the 2017 deal between Gov. Dannel Malloy and the State Employees Bargaining Agent Coalition (SEBAC), which made changes to the umbrella contract governing retirement and health benefits for state employees in an effort to bridge a massive, multi-billion dollar budget deficit.

Part of those changes included creating a new retirement tier for employees hired after June of 2017, putting them into a “hybrid plan,” which combines elements of both a defined benefit pension plan and a defined contribution, 401(k) style retirement plan. But the Tier IV plan also includes “risk sharing” as part of the employees’ contributions toward their own retirement.

That risk sharing means that when Connecticut’s pension investments fall short during the previous calendar year, Tier IV employees must help make up the difference in the following fiscal year.

“When the fund’s investments fail to perform as expected, the State must make a larger contribution to cover the anticipated costs,” wrote John Harrington of the Retirement Services Division of the Comptroller’s Office. “When the fund’s investment income fails to meet expectations, Tier IV members must help make up for that shortfall by making a larger contribution to the plan for the next fiscal year.”

According to the latest actuarial evaluation of SERS, which was prepared on June 30, 2022, there were 14,175 state employees in the Tier IV group, including hazardous duty, hybrid and “other.”

The 2 percent increase is the maximum allowable under the terms of the SEBAC contract because the pension investment loss was so large. Hazardous duty members in the Tier IV plan already pay 8 percent toward their retirement, while all others pay 5 percent.

SEBAC just last year secured wage agreements for all bargaining units that included three consecutive 2.5 percent pay increases between 2021 and 2023, part of a $1.9 billion overall package that included bonuses as well.

The increase in pension contributions for those members comes as researchers from Yale University found that Connecticut’s pension investments have historically underperformed saying Connecticut had “one of the single worst investment track records of all 50 states,” in an op-ed by Yale School of Management senior associate dean Jeffrey A. Sonnenfield and director of research Steven Tian for Yale’s Leadership Institute.

The researchers, assisted by a team, found Connecticut could have saved $27 billion over the last ten years had the state yielded the median returns of all other states.

Connecticut’s largest pension funds – SERS and the Teachers Retirement System (TRS) – have long plagued the state’s budget with ever increasing costs arising from a historical lack of savings, pension bonds, and ballooning debt payments as a result of previous SEBAC deals under Gov. John Rowland’s administration.

Part of the 2017 budget – the same year which saw the SEBAC 2017 deal create the Tier IV retirement plan – established budgetary guardrails that would help pay down those pension debts, including transferring volatile income tax revenue tied to Wall Street into the Rainy Day fund and then, when the Rainy Day Fund is full, putting that surplus revenue into paying down the pension debt.

Gov. Ned Lamont also moved to restructure the retirement debt for both funds by stretching out the payments, which lowered the costs in the near term while ultimately increasing the total payments in the long term. Under that restructuring, Connecticut will not pay off its pension debt until 2046.

Meanwhile, thanks to state revenue surpluses, Connecticut has paid down more than $5 billion in unfunded pension obligations, resulting in the first decreases to Connecticut’s pension debt in years and freeing up hundreds of millions in the state budget.

The state is anticipated to pay $2.1 billion toward SERS this fiscal year and $1.5 billion toward TRS, both of which are largely payments toward the debt. Those figures could likely increase in the future, however, because the annual payments are based on the assumption Connecticut will reach its 6.9 percent market return rate.

According to the Treasurer’s Office, so far, this calendar year, Connecticut’s pension fund investments are performing slightly better with a 4.2 percent return for SERS and 3.9 percent return for TRS.

However, the ten-year return for both funds is short of the 6.9 percent assumed in Connecticut’s valuations.