As the stock market continues its rocky year, Connecticut’s pension funds have taken a beating, showing negative returns approaching 15 percent for the calendar year and lowering the overall ten-year rate of return below the state’s assumed rates.
Connecticut’s two largest and most indebted pension plans, the Teachers Retirement System (TRS) and the State Employees Retirement System (SERS), show returns of negative 14.68 percent and 14.55 percent respectively, according to the latest pension performance report for the month of September.
The latest performance evaluation shows those pension fund losses roughly doubled since the July 2022 report in which the TRS showed a negative return of 7.8 percent for the year and SERS showed negative 7.79 percent.
The stock market has been registering losses partially based on fears of a looming recession and the federal reserve’s hiking of interest rates to combat inflation. The negative returns have pushed Connecticut’s pension fund performance below the state’s assumed rate of return of 6.9 percent.
Despite the pension funds registering losses in July of 2022, the ten-year compound annualized return on the state’s pension fund performance remained at a little more than 7.5 percent. The latest September report shows the ten-year performance at roughly 6.4 percent for both plans.
Failing to meet the assumed rate of return could mean the state will have to contribute more toward annual payments into its pension systems in order to meet obligations. The losses can also increase the unfunded pension debt.
The last time Connecticut’s pension funds performed so deeply in the negative was the 2008 and 2009 financial crisis, during which SERS saw a loss of 18.62 percent in 2009 before bouncing back 13.45 percent in 2010. Between the years of 2008 and 2010, Connecticut’s unfunded liabilities grew by more than $2.5 billion and its funded ratio declined from 51.9 percent to 44.1 percent.
Connecticut is already set to save hundreds of millions per year following the state’s payoff of billions in pension debt under the state’s volatility cap, which transfers revenue surplus tied to investment earnings into the budget reserve fund. When the reserve fund is full, it uses the money to pay down the pension debt that has plagued Connecticut’s budget over the last decade and led to tax increases.
Income taxes on investment earnings and business taxes have propped up Connecticut’s budget this past year, leading to revenue surpluses and allowing billions in pension debt to be paid down. With Wall Street showing losses the trend may not continue, although state financial analysts note revenue would have to fall extensively before showing a deficit.
TRS and SERS account for roughly $37 billion in market assets, according to the pension performance reports. Connecticut’s pension debt for those two plans currently amounts to roughly $38 billion, according to the latest 2022 valuations.