Connecticut’s unfunded debt for retiree healthcare and other benefits, known as OPEB, decreased by $4 billion over the last year, according to the recently released actuarial report.
Connecticut’s unfunded liabilities for OPEB totaled $19.5 billion as of the last valuation in June of 2022, but that figure has now dropped by $4 billion based on a change to the discount rate, which assumes a certain return on the fund’s assets which are invested in the market.
Changes to assumed rates of return can greatly affect not only the net liabilities for a pension or OPEB fund but can also affect how much the state is required to save to cover its obligations; a higher discount rate means the state is required to funnel less money to meet its annual required contribution.
According to the actuarial evaluation, Connecticut adjusted the discount rate for its OPEB fund from 2.31 percent to 3.9 percent – a figure based on a combination of bond yields and the 6.9 percent return expected by Connecticut’s pension funds.
The change means Connecticut’s contributions to the OPEB fund – called the service cost – has also decreased from $1.2 billion per year to $906 million, resulting in savings of roughly $300 million, and increases the trust fund’s position from 10.12 percent funded to 12.63 percent funded.
This marks the second year in a row of decreases to the OPEB trust funds debt by more than $4 billion after the fund saw increases of roughly $5.6 billion over 2020 and 2021.
According to the 2022 actuarial evaluation, OPEB liabilities decreased by $4.9 billion largely due to new Medicare Advantage rates secured by the Comptroller’s Office. In total, the past two valuations have seen Connecticut’s OPEB debt decrease by nearly $9 billion.
For decades prior to 2009, Connecticut saved nothing for retirement health benefits, racking up immense debt before Gov. Jodi Rell and the State Employees Bargaining Agent Coalition inked a deal to have state employees start contributing toward the trust fund. A follow-up deal in 2011 by Gov. Dannel Malloy increased the number of years employees have to contribute to the program but also required the state to start contributing as well beginning in 2017.
Despite that deal, OPEB liabilities – combined with Connecticut’s larger pension liabilities – continued to grow, but as the state has begun saving and paying down its debts through a variety of mechanisms, Connecticut’s long-standing record of escalating retirement debts appears to be shifting – at least for now.
Connecticut Comptroller Sean Scanlon recently announced another round of debt payoff for Connecticut’s two major pension funds – the State Employees Retirement Fund (SERF) and the Teachers Retirement Fund (TRF) – totaling $1.9 billion, based on a state budget surplus.
Under a budget deal struck between Republicans and Democrats in 2017, surplus revenue from volatile tax sources like investment income is transferred to the state’s Rainy Day Fund and, once the reserve fund is maxed out at 15 percent of the General Fund, any additional surplus revenue will be used to pay down Connecticut’s long-standing pension debt. The result has been more than $8 billion paid down on the state’s pension debt, resulting in overall yearly savings for government operations.
The General Assembly and Gov. Ned Lamont continued those fiscal guardrails at the beginning of the 2023 legislative session, although some progressive organizations and lawmakers believe those guardrails are taking money away from needed social services.
The new actuarial reports for Connecticut’s SERF and TRF pension funds are not yet publicly available, however the state’s total liabilities (not just unfunded) for OPEB decreased from $21.7 billion in 2022 to $17.7 billion in 2023.
The OPEB trust fund covers 130,170 members, including active and retired state employees.