For much of the last decade, Connecticut has ranked last or second to last in national rankings when it came to the state of its pension system, but now Connecticut is actually moving up the list, according to a new annual study released by Equable, run by Anthony Randazzo who has written studies about Connecticut’s pension system in the past.
According to Equable’s State of Pensions 2024 research brief released this month, Connecticut ranked 46th in the country with 63.5 percent of its pension system funded, and facing $33.2 billion in unfunded liabilities. The new ranking put Connecticut ahead of states like New Jersey, Kentucky, and Illinois.
While 46th in the country may not be anything to gloat about, it is a marked improvement from two years ago when the same study showed Connecticut as 48th in the country, with its pension system only 51.5 percent funded and facing $41.8 billion in debt.
Connecticut has made significant headway in paying down its state employee and teacher pension debt under the state’s volatility cap – part of the “fiscal guardrails” established in the 2017 budget that directs volatile tax revenue related to Wall Street earnings to the Rainy-Day fund and, when that is full, to pay down the state’s unfunded liabilities.
Pension debt costs crippled Connecticut’s budget throughout the 2010s, resulting in massive tax increases and givebacks by state employee unions. Since implementing the cap, Connecticut has a full Rainy-Day fund and has paid down more than $8 billion in unfunded liabilities, freeing up hundreds of millions in annual debt payments.
However, Equable also attributes the improvement of pension funds across the country to improved investment returns, which, historically, has been a sore spot for Connecticut.
In 2023, researchers at the Yale School of Management found that Connecticut’s pension investments over two decades were the second worst performing in the nation and estimated Connecticut would have made $27 billion had the state just earned the median investment return of other states. The report spurred a reckoning in the State Treasurer’s Office, which had just come under the purview of Erik Russell following Sean Wooden’s departure.
Equable found an average investment return rate of 10.3 percent across state and local pensions, an improvement over last year, and far better than the negative 6.1 percent in 2022, but far from good when compared with passively managed index funds.
“This year’s 10.3% average investment return is better than the average assumed rate of return that public plans were using last year (6.87%), but it is less than the performance of most major public equity indices like the S&P 500,” the report said.
The Vanguard Total Stock Market Index Fund, for instance, returned 23.75 percent over the course of 2024, while State Treasurer Erik Russell touted Connecticut’s 11.5 percent investment returns over fiscal year 2024, which beat Connecticut’s 6.9 percent assumed rate of return and the national average for public pension plans, in a press release.
“The full portfolio of funds and trusts administered by the office, including those for retired state workers and teachers, saw returns of 11.5%, adding approximately $7.5 billion in plan assets during the fiscal year,” the press release said. “Reforms put in place in recent years to reallocate plan assets, mitigate risk, lower fees, and recruit and retain investment talent all contributed to the positive performance.”
The General Assembly and Gov. Ned Lamont will also have to contend with calls by some lawmakers and advocacy groups to adjust the guardrails – particularly the volatility cap.
While Lamont, Russell, and State Comptroller Sean Scanlon have long praised the savings from the guardrails, rising costs and the end of federal COVID dollars may have lawmakers feeling both a fiscal and political pinch this year as numerous agencies and nonprofits seek to divert some of that volatile surplus revenue back into the General Fund.
The governor and legislature will also have to contend with a new wage contract for unionized state employees that can not only dig into the budget surplus, but also adds to the overall pension liabilities as salaries rise.
Nationally, Equable found that state pensions, and local pensions with over $1 billion in assets, faced a total combined shortfall of $1.37 trillion in 2024, an improvement from $1.64 trillion just last year, largely due to improved investment performance.
But the organization warned that most state and local pensions remained “distressed” or “fragile.”
“The good news for state legislatures and local government employers is that three straight years of improved funded status for public plans prevented additional unfunded liabilities from piling up,” the report said. “The bad news is that there is still more than a trillion in pension debt that can’t be paid down using today’s level of contributions. The need for contribution rate increases remains as urgent as ever, irrespective of the budgetary pressures this creates.”
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The current pension system is a huge burden on Connecticut taxpayers. It would be wise for legislators to phase out the current defined benefit package towards a self directed IRA system which has been embraced by the private sector. This would help reduce the amount of taxes Connecticut residents are forced to pay.
Agree with Michael J and would add that CT taxpayers should be willing to 100% fund the current obligation and even add a premium to transition to a defined contribution system where the accounts are owned and controlled by the pensioner.
So to sum up what you’re saying is: Ct pension liabilities are bad but not as bad as it could be at the moment but it will get worse in the future. WOW, I feel good as a Ct taxpayer.