As the State of Connecticut prepares to pay down another $4.1 billion in pension debt, the most recent pension valuation published by the Office of the State Comptroller shows Connecticut may have turned a corner in its fight against unfunded retirement liabilities.
Connecticut’s state employee pension debt topped out in 2020, according to the report, with unfunded liabilities reaching $23.7 billion, or 35 percent of what is needed to cover estimated payments. In 2010, the unfunded liabilities were $11.7 billion, according to the actuarial report for that year.
However, 2021 saw a $1.5 billion drop in unfunded liabilities, which included a $776.2 million paydown of the pension debt, according to report, and Connecticut’s funded ration boosted to 44 percent.
Under Connecticut’s volatility cap, passed as part of the 2017 budget agreement, tax payments stemming from volatile earnings tied to investments that come in higher than expected are used to pay down the state’s pension debt once the Rainy Day Fund reaches its maximum level of 15 percent of the General Fund.
Connecticut paid down $1.6 billion in pension debt in 2021, splitting the payment between the State Employee Retirement System (SERS) and the Teachers Retirement System (TRS).
The reduction of Connecticut’s SERS liabilities marks a hopeful sign that the state is reversing its long-standing pension problems and will decrease the annual payment required to pay off the debt, freeing up hundreds of millions for the budget.
Connecticut’s SERS debt declined by a smaller amount once before in 2017, according to the report, but quickly sprang back up the following two years until topping out in 2020.
And while a funding ratio of 44 percent is not considered healthy by a long shot – actuaries tend to consider 80 percent a minimum funding ratio for a public pension plan to be considered healthy – it marks an improvement.
In 2020, Connecticut’s two major pension funds for state employees and teachers had total unfunded pension liabilities of $41.7 billion, including $18 billion in teacher pension debt. The Teachers Retirement Board has not yet released its latest valuation but has also benefitted from the volatility cap payments.
Rising pension payments have caused budgetary chaos over the last ten years, resulting in tax increases during Gov. Dannel Malloy’s administration, which he said went entirely to covering pension debt payments.
“By prioritizing paying down the state’s pension debt, we’re removing an economic anchor that threatened to hold back Connecticut’s long-term growth,” Gov. Ned Lamont said in a July 7 press release. “As a result, the working people of Connecticut will not have to endure a repeat of the years of budgetary warfare in the Capitol that led to tax increases and cuts to critical services.”
The newest estimated pay down of roughly $4 billion, is built on a massive budget surplus of $4.3 billion for fiscal year 2022, coming mostly from income taxes related to investment earnings, as well as gains from the state sales tax.
But Wall Street’s latest downward slide could have an impact in the future, as pension investments will likely not hit their 6.9 percent assumed rate of return, which could increase total liabilities and dry up income taxes related to investment earnings.
Gov. Ned Lamont and Democrats included $660 million in tax relief during the 2023 session, including a child tax rebate of up to $750 that families must apply for by July 31, 2022. Republicans, however, have called for using the budget surplus to give more tax relief to combat inflationary pressure on Connecticut residents.
Pensions are not the only retirement debt the state has, however. Retiree healthcare, known as Other Post-Employment Benefits, has also increased over the years. The latest valuation, based on 2020 measurements, saw the OPEB liability increase by $2.8 billion to $23.5 billion, largely due to lowered return assumptions and rising healthcare costs.
However, Connecticut Comptroller Natalie Braswell announced a new contract with Medicare Advantage she says will reduce OPEB liabilities by $7.5 billion and save the state $400 million over the next three years.
“The painstaking work of getting Connecticut’s fiscal house in order continues to payoff for taxpayers,” Braswell said. “The reforms that have filled the Rainy Day Fund with a current balance of $3.1 billion and helped pay down pension debt, will also free up resources that can be used to help working families, protect critical services and guard against national economic turmoil.”
Gov. Ned Lamont extended the pay off date for both teacher and state employee pension debt out until the 2040s to prevent the annual payments from reaching unsupportable levels. And while that may have staved off severe budget problems, it did add several billions to the total pay off amount.
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