While Connecticut has made headway paying down billions in state employee and teacher pension debt, another state-run retirement plan is heading in the opposite direction.
The Connecticut Municipal Employees’ Retirement System (CMERS), which was established as a state-run employee pension option for towns and cities, has long been overlooked when it comes to Connecticut’s staggering pension debt, mostly because the system remained well-funded compared to Connecticut’s two largest pension plans for state employees (SERS) and teachers (TRS).
Unlike the state, which either didn’t pay into their pension systems for decades or negotiated to underfund them, municipalities participating in CMERS are required to pay the full annual contribution each year.
Despite making that full contribution, however, CMERS has racked up a large amount of debt in a very short period of time. While SERS and TRS are paid for with taxpayer dollars from income, sales and other taxes that go to the General Fund, the CMERS debt is covered by towns enrolled in the system and paid for with property taxes.
Since 2016, CMERS pension debt has increased from $332 million to $1.3 billion, a 313 percent increase in just six years, according to the latest accounting, and that means the cost to towns increases to cover the debt.
For public pension plans, funding over 80 percent is generally considered healthy, and CMERS was, up until 2018, when its funded ratio plummeted from 91.68 percent to 72.69 percent. The system now stands at only 68.7 percent funded.
During the same time period, employer contributions to cover the cost of CMERS have increased from $108 million to $134 million for municipalities participating in the system. That increase strains municipal payrolls, as MERS payments rose from 14.3 percent of payroll to 20.2 percent.
And it doesn’t just affect the town side, municipal employees are required to pay bigger chunks of their paychecks to support the system as well. Under legislation in 2019, employee contributions were increased by .5 percent over the next six years.
The total contribution by members has increased from $24 million to $32.8 million between 2016 and 2022 driven, in part, by increasing participation in CMERS, but that could also be part of the problem.
In 2016, CMERS had 8,477 active members and 7,769 inactive members. By 2022, there was an imbalance in the numbers: 9,830 active members and 14,487 members who were either receiving benefits, inactive but entitle to benefits, or inactive and entitled to a refund of their contributions.
According to a March 3 letter from Ellington Public Schools Director of Finance and Operations Brian Greenleaf to Connecticut Comptroller Sean Scanlon “the cost of the defined benefit pension administered by the Comptroller’s Office is less of a bargain.”
“For our participating employees, we now see benefit costs exceeding 25% before factoring in group insurances such as health and dental. Despite a 72% increase in our contribution rate since 2017, the 2022 actuarial report shows the funded ratio actually decreased during that period,” Greenleaf wrote. “The lack of flexibility in the system is burdening our ability to operate our school district and plan accordingly. Based on the 2022 actuarial report, we expect an increased payment of $100,000 above our salary base. This is 400% of the projected increase in the 2021 actuarial report. No budget can be put forth with any certainty with that level of volatility.”
The problem of the increasing MERS costs is not limited to Ellington. Whereas Connecticut’s state employee pension plan has been altered numerous times, adding tiers for new hires and adjusting contribution rates, fixes for MERS have been more limited.
In addition to increasing the employee contribution rate, MERS also lowered their assumed rate of return from 8 percent to 7 percent, which also increases the unfunded liabilities, and amortized the debt over 25 years, according to a slide presentation from the Comptroller’s Office.
Brian O’Connor, director of public policy for the Connecticut Conference of Municipalities (CCM), says the increasing costs of MERS is widespread across their member cities and towns.
“A significant amount of our members that are in MERS are affected by it,” O’Connor said. “I think the major problem with it, is that it’s in statute, it’s been like this since the 1940s, and right now the contribution rates are defined in statute and they’re really low when compared to other defined benefit plans that other municipalities are in, and it falls on the back of municipalities.”
“You want a fully funded pension plan, but, again, it hasn’t been changed. The state system has been changed numerous times. They’re on Tier IV right now, we’re technically still on Tier 1,” O’Connor said. “It’d be great if we could get some changes to that such as being able to negotiate the contribution rate, also looking at the [cost of living adjustments] and the age you can retire fully. A lot of those things have changed at the state level to save money and we have not had the same recourse.”
Betsy Gara of the Council of Small Towns (COST) says the employer and employee contribution rates are “increasing significantly.”
“It’s creating some very difficult circumstances for those towns that are participating in CMERS,” Gara said. “We’ve been talking about concerns regarding CMERS for a number of years now and they made some modest changes a couple years ago, but it’s certainly not enough to fully address the concerns.”
In a comment via email, Comptroller Sean Scanlon said he has put together a working group to help tackle the issue.
“We are all aware of the systemic challenges facing the CMERS system,” Scanlon said. “That is why, as the new Comptroller, I’ve put together a working group comprised of municipal and labor leaders to collaboratively discuss meaningful solutions that keep costs reasonable for cities and towns while ensuring our police officers, firefighters, and other critical municipal employees can count on the retirement they deserve.”
“They really have to make some changes”
According to the comptroller’s slide presentation, there were several reasons for the rate increases this year, including an investment return rate of negative 8.92 percent, a retirement surge of municipal employees in 2022 and cost of living adjustments for retirees that are tied to the rate of inflation, which surged to record high levels this past year.
And while that may explain the rising costs this year, it does not explain the dramatically rising debt over the past six, when the stock market was surging and inflation relatively normal.
Aside from the working group of municipal and labor leaders, the Comptroller’s office is also pursuing a regulatory change to update how and when a retired CMERS employee can receive a pension while working for another CMERS municipality. Prior to 2022, a retired CMERS employee could not simultaneously take a pension and work for another participating municipality unless the reemployment was limited.
The legislature, however, changed that rule, allowing that same retired CMERS employee to continue receiving a pension and work any number of hours for another CMERS municipality, although they could not obtain a second pension.
However, the slide presentation notes that this legislative change “is problematic because it violates several rules under IRS,” and Scanlon is moving to update the regulations.
Under the proposed regulatory change, a retired CMERS employee who reached a normal retirement age of 55 or older can only collect if they work for a non-CMERS town. If they took early or disability retirement, can only collect their pension while working for a CMERS town when they reach 59 and a half years old and work a limited number of hours, or they do not participate in CMERS during their employment.
But the changes municipalities are hoping for are more dramatic: they are hoping for a tiered system for new hires, similar to the Connecticut State Employees Retirement System (SERS), and increasing the contribution rates by employees. But that could mean a prolonged battle with municipal employee unions, largely represented by AFSCME Council 4.
“Right now, the contribution rates are heavily born by the municipality, I think we’d like to negotiate that with the local union,” O’Connor said.
“There’s a lot of things they can do, but, of course, they’re going to meet with resistance,” Gara said. “But, at this point, they really have to make some changes.”
The other part of the problem with CMERS, according to the municipal association leaders, is that it functions like “Hotel California,” in that once a municipality enrolls in CMERS, it is nearly impossible to get out of if that town wants to move to a different benefit plan or 401(k) style retirement plan. In order to leave CMERS, the municipality must offer a plan with the same benefits or more.
That hampers municipalities’ ability to rein in property taxes, which in Connecticut are some of the highest in the nation, through reforming pay and benefit structures for employees. A number of towns in Connecticut have switched from pension plans to defined contribution plans in order to save money, but O’Connor and Gara say making such a change is not “viable” under CMERS.
“Once you’re in, you can’t get out,” O’Connor said. “With some other defined benefit plans, municipalities have been able to negotiate with unions through the collective bargaining process where they move to a 401(k) or defined contribution plan and they might get more medical or a higher wage. You’re not able to do that if you’re in CMERS. To buy out, it’s exorbitant.”
“There’s no viable way out of CMERS once, you’re in,” Gara said.
Another state mandate or retaining first responders?
Although CMERS has been racking up debt over the last six years, there is a push at the Capitol this year to require that municipalities enroll police and firefighters into either CMERS or a comparable defined benefit plan that received a public hearing before the Public Safety and Security Committee.
An Act Requiring Pensions for Police Officers and Firefighters was heavily supported by municipal and state unions and opposed by municipalities.
Executive Director of AFSCME Council 4 Jody Barr said in written testimony said that towns that have switched from pension plans to 401(k) style plans have had difficulty retaining officers and firefighters and that the loss of pension plans means older employees must stay on the job long after their bodies can physically withstand the rigors of police or fire fighting work.
“There has been a trend of municipalities doing away with, or ‘closing,’ pensions for police officers and firefighters. Even several wealthy municipalities have been able to strip their police and firefighters of pensions in arbitration,” Barr wrote. “Connecticut is facing a police officer retention and recruitment crisis. Who would take a job, where your life expectancy was 59-years-of-age on the average, and you were guaranteed to have an insufficient retirement?”
President of the Guilford Police Union Officer Mark O’Connor wrote that his department, which has a 401(k) style retirement plan, has been losing officers to towns enrolled in CMERS and that each officer lost means training costs lost by the town, roughly $150,000 per officer.
“Our exit interviews of these officers reveal that Pension/COLA are the main reasons,” O’Connor wrote. “The inability of law enforcement to hire and retain POST certified, constitutionally motivated community-based officers, is a public safety emergency.”
According to police union leaders interviewed by the Stamford Advocate, police staffing in Connecticut is down between 25 and 30 percent. Two other bills aimed at increasing police and firefighter retention, include a number of other provisions, but would also mandate, to some degree, that cities and towns participate in CMERS or a comparable plan.
Steve Stephanou, town manager for Manchester where firefighters are part of the CMERS system but not other municipal employees, says the bill amounts to an “unfunded mandate” on municipalities and that their cost for participating is CMERS has grown dramatically.
“Decades of overly optimistic actuarial assumptions for MERS are now rightfully being corrected to account for the increasing average lifespans of municipal retirees and more realistic investment returns. Unfortunately, these actuarial reforms have not been accompanied by any structural reforms to the underlying benefits formula and, consequently, the tax burden has increased on local taxpayers without any change in service levels,” Stephanou wrote. “In 2017 the town allocated approximately 16% of payroll to MERS; that cost is now 25%.”
Bridgeport Director of Legislative Affairs Constance Vickers wrote that the inclusion of overtime earned by police and fire personnel outside their municipal duties into MERS has left city taxpayers with a financial burden.
“The addition of overtime into pension calculations with annual percentage increases, has totaled more than $40 million over nine years (FY14 through FY23) which has been extra financial burden to Bridgeport taxpayers,” Vickers wrote.
Vickers offered a number of options if the legislature wished to incentivize municipalities to join, including the creation of new retirement tiers, increasing employee contribution rates and increasing the retirement age past 55 years old.
Gara, who testified against those bills, says now is not the time for such a mandate. “That would be a big problem,” Gara said. “The CMERS system is broken, now is not the time to mandate that municipal employees participate in the program. We need to provide towns with more flexibility to be able to negotiate retirement benefits without being subject to a state mandate.”
“That’s a big problem,” O’Connor said, noting that towns and cities that have their own retirement systems have negotiated those rates and made them part of their budget. A switch could cost a lot of money. “Even initially, it’s going to be a huge jump.”
“This was collectively bargained and now you’re trying to get [municipalities] into a system that they’ve looked at, they’ve had sixty or seventy years to jump into it, and they haven’t done it,” O’Connor said. “And now you’re forcing them.”