Following decades of escalating pension costs for state employees and teachers that wreaked havoc with Connecticut’s budget because the state had not saved enough, the latest pension valuations show Connecticut has reduced its unfunded pension liabilities, freeing up hundreds of millions for the General Fund.

According to the latest valuations, Connecticut’s State Employees Retirement System (SERS) increased its overall funded ratio from 48.5 percent in 2022 to 52 percent in 2023, and the Teachers Retirement System (TRS) increased its funded ratio from 57 percent to 59.8 percent.

Although neither is considered healthy in terms of pension funding, it does mark a turnaround following years of increasing unfunded liabilities and, therefore, increasing annual payments toward the debt, increased taxes and contract negotiations with state employees that increased their contributions and lowered benefits to make up the difference.

Former Gov. Dannel Malloy had stated that Connecticut’s tax increases in 2011 and 2015 went entirely to pay for the escalating cost of state employee and teacher pensions.

While the year-over-year change seems somewhat small, the change in funding ratio over the past eight years is much more substantial. In 2016, SERS was only 36 percent funded with $20.3 billion in unfunded liabilities. While SERS continues to have roughly $20 billion in unfunded liabilities, its assets have grown by $10 billion during that period, significantly increasing the funding ratio.

Meanwhile, the unfunded liability for TRS has increased by $3.3 billion over that same time frame, but assets increased by nearly $8 billion, increasing the funded ratio from 56 percent to nearly 60 percent. The total unfunded debt for TRS currently stands at $16.4 billion.

One major contributing factor to the change has been the fiscal guardrails enacted by the bi-partisan budget agreement in 2017, which funnels volatile income tax revenue surplus tied to Wall Street earnings into the Rainy Day Fund and then, when the reserve fund is full, deposits that surplus into the pension system.

Since the pandemic, Connecticut has experienced significant budget surpluses and thus deposited roughly $8 billion into both SERS and TRS. The result is savings of $738 million per year in reduced annual payments to both pension systems, according to Connecticut Comptroller Sean Scanlon.

“By adhering to the guardrails and paying off our debt, we are seeing immediate savings that has been put to other uses, such as a historic tax cut and investments in education, while also relieving the burden on future generations of Connecticut residents,” Scanlon said in a press release, which he and Gov. Ned Lamont said allowed Connecticut to cut income taxes and raise the Earned Income Tax Credit (EITC) starting in 2024.

Connecticut has also lowered its debt related to retiree healthcare, with unfunded liabilities decreasing by roughly $4 billion over the last year, resulting in annual savings of nearly $20 million per year. The state had never saved for retiree health benefits prior to 2014, so the funding ratio remains very low at 12.6 percent, but that marks an increase of 2 percent over the last two fiscal years. Much of the change can be attributed to administrative changes made to the retiree healthcare plan like switching to the Medicare Advantage plan.

Connecticut’s retirement costs, including pensions and healthcare, are part of the fixed costs of the budget that now take up roughly 53 percent of the General Fund. For years, fixed cost increases outpaced state revenues creating a structural imbalance requiring either program cuts or tax increases. 

However, the latest report from the Office of Fiscal Analysis (OFA) shows the trend has reversed and revenues are now outpacing the rise in fixed costs, but budget analysts, including Lamont’s budget chief Jeffrey Beckham, have warned lawmakers increases in non-fixed cost spending could upset the balance.

Although the pandemic and post-pandemic years resulted in large surpluses for Connecticut that were then used to paydown some of the pension debt, those surpluses have begun to dry up. OFA predicts, however, that Connecticut will continue to see budget surpluses for the next four years, albeit smaller than the state has seen over the last three.

Connecticut’s fiscal guardrails combined with increased tax revenue over the past few years meant Lamont and the General Assembly were able to pass the first cut to Connecticut’s state income tax since its inception.

“These tax cuts are possible due to the fiscal discipline we’ve implemented over the last five years, which has stabilized the state’s fiscal house and ended a trend of too many years of deficits and uncertainty,” Lamont said in a press release.

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