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Underfunded Teacher Pension Fund could hinder future budgets

Underfunded Teacher Pension Fund could hinder future budgets
Waterbury Republican-American, February 1, 2019
 
By Paul Hughers                                                    

              

A state-run pension fund for public school teachers is $13 billion out of whack, a slow-ticking time bomb that needs to be defused before it blows up the state budget.

The question of how to solve the nagging and astronomically costly challenges to the viability of the Teachers' Retirement System now falls to Gov. Ned Lamont and the state legislature, as a new state budget must be crafted during the next five months.

A number of possible solutions to the fiscal conundrum have been outlined, and any response that state leaders devise is likely to involve a combination of approaches.

Some potential actions include transferring lottery proceeds and other state assets to the pension fund; adjusting the rate of investment returns; higher member contributions; revising cost-of-living adjustments; restructuring benefits; moving new teachers to Social Security or establishing a new retirement plan; having cities and towns contribute to teacher pensions; and paying off pension obligation bonds issued in 2008 early and re-amortizing the debt. Consensus likely will be difficult to forge.
 

"It is going to take leadership from the top to get people around the table to determine what is viable and what isn't," said Rep. Jason Rojas, D-East Hartford, the House chairman of the Finance, Revenue and Bonding Committee.

"We have to do something," said Senate Minority Leader Leonard A. Fasano, R-North Haven. Failure to remedy the funding issues leaves the state exposed to annual increases amounting to hundreds of millions of dollars each year throughout the coming decade.

"The teachers' pension fund, we have a cliff out there in four or five years where our annual contribution could double, triple, quadruple, which would just be a deal breaker for this state, and it doesn't advantage teachers," Lamont said. Public school teachers in Connecticut have an independent retirement system because teachers in the 1950s decided not to join Social Security when given the opportunity.
 

Teachers and school districts make no contributions to the Social Security system and teachers cannot collect benefits based on their work for a school district. Instead, the state provides teachers with retirement benefits through the Teachers' Retirement System.

When Congress passed the Social Security Act in 1935, federal, state and local government employees were excluded from mandatory coverage. In the early 1950s, the law was amended to allow state and local government employees to voluntarily elect in a referendum to receive coverage.

Connecticut teachers voted against joining the Social Security system. In 1959, at the request of the Connecticut Education Association, the General Assembly passed a state law prohibiting another referendum.

A 14-member Teachers' Retirement Board administers the state-run pension fund.

State law mandates the membership include four active teachers and two retired teachers. The governor gets to appoint five public members. The state commissioner of education, the state treasurer and the secretary of the Office of Policy and Management round out the board as ex-officio, voting members.

Teachers' Retirement Board approves actuarial valuation reports, selects actuarial consultants, and OKs service retirements, survivor benefits, applications for disability allowances, cost-of-living adjustments, and requests for purchasing service toward retirement eligibility.

State Comptroller Kevin Lembo expressed concerns during his 2018 re-election campaign over how the board and the retirement plan have been operating, but he said he is holding off on recommending any changes for the time being.
 

He said he wants to give the new administration of Gov. Ned Lamont time and leeway to propose its own recommendations concerning the Teachers' Retirement System. Lamont will be proposing his first two-year budget plan on Feb. 20.

Lembo said he also wants to wait on the recommendations of the state Pension Sustainability Commission that is exploring options for reducing the massive unfunded liabilities of both the Teachers' Retirement System and the State Employees Retirement System.

The 13-member panel includes a representative from the comptroller's office. The comptroller is a nonvoting member of the State Employees Retirement Commission, along with the state treasurer. Also, the Retirement Services Division of the comptroller's office administers state pension plans serving more than 40,000 state retirees.

Lembo said he has no plans at this time to ask that the comptroller be made a member of the Teachers' Retirement Board.
 

"A lot of work has been done — and is underway — to detangle the state's retirement systems, through the legislature, through the state's Pension Sustainability Commission and by a new administration that I'm confident is ready for a new day of collaboration," Lembo said. "We will need to work across differences to ensure ongoing retirement security for teachers and for all Connecticut workers."

The Teachers' Retirement System was 58 percent funded in 2018, and it had accrued an unfunded liability of $13.2 billion, according to the latest valuation report.

Before 1979, Connecticut paid retirement benefits out of each year's state budget. Then, the state adopted an actuarially designed plan that covered current benefits and paid down the unfunded liability, but state leaders continually paid less than deemed necessary.

The unfunded liability from the state government skimping on its annual pension contributions continues to put significant pressure on the state budget as funding requirements increase over the coming years. Teachers, on the other hand, made their statutorily required contributions.

Part of the problem stems from overly optimistic rates of investment returns. The shortchanging of the state's annual contributions also meant less investment earnings. If nothing is done, the cost of the Actuarially Determined Employer Contribution to the pension fund has been projected to rise to more than $3 billion in 2032. In contrast, this year's ADEC, as it is called, is $1.4 billion in a $20.8 billion budget.

The legislature's Office of Fiscal Analysis projected a possible outlay of $3.7 billion in 2032 between the normal cost of retirement, paying down the unfunded liability and debt service. The office calculated that costs will increase $254 million over the upcoming two-year budget cycle.

Of course, there is no shortage of complications.

One of the biggest involves the $2 billion in pension obligation bonds that were issued in 2008 to help pay down the unfunded liability.
 

The 2007 law that authorized the bonds requires the state to make the full ADEC through the 2032 fiscal year. Also, covenants provided to bond buyers contractually oblige the full funding of the state's yearly contribution. Additionally, the 2026 fiscal year is the earliest the bonds may paid off early.

Any use of state lottery revenue would have other budget implications. This year's budget anticipates a $350 million in lottery proceeds. Since 1972, contributions to the general fund have exceeded $9.5 billion. Also, proposed transfers of other state capital assets may involve legal complexities.

Another wrinkle is that the pension plan is established in state statute and not subject to collective bargaining, so changes in plan design and contribution rates would require legislation, and so would any proposal to retire 2008 bonds earlier than scheduled.

A good argument can be made that decisions of past legislatures and governors not to pay the state's full share got the pension fund into trouble in the first place.

 

Teacher unions have expectation back to top

Also, the Connecticut Education Association and AFT Connecticut can expected to zealously represent the interests of their members and retirees. The larger CEA represents more than 37,700 active teachers and 5,500 retirees.

The CEA position is the long-term viability of the Teachers' Retirement System does not require changes to the benefit structure, said Robyn Kaplan-Cho, a CEA retirement specialist.

In fact, the union is lobbying to repeal a 1 percent increase approved in 2017 that brought the annual contribution for teachers to 7 percent of salary. It is also prepared to oppose any additional increases for teachers.

"It is taking a significant chunk out of their earnings, so to compound that with an additional contribution increase to solve a problem that they did not create is not equitable in our mind," Kaplan-Cho said.

The CEA is confident in the security of the pension fund and future benefits. "While we are concerned about the annual contribution rising and creating a lot of pressure on the budget, we have no doubt that the legislature will continue to do what is right for our teachers," Kaplan-Cho said.

The CEA also continues to oppose switching teachers to Social Security.

The Connecticut Conference of Municipalities and the Connecticut Council of Small Towns will be vigilant in watching out for the interests of the state's 169 municipalities.

Cities and towns fought former Gov. Dannel P. Malloy when he proposed local governments start contributing toward teacher pensions. Malloy recommended to Lamont that municipalities contribute toward the normal cost of pensions in a transition budget plan.

"We haven't heard anyone mention that yet in my circles. We haven't heard anyone from the new administration saying this could be brought back up for consideration," said Waterbury Mayor Neil M. O'Leary, president of the Connecticut Conference of Municipalities.

He said local leaders would likely resist any renewed proposal to have cities and towns contribute toward teacher pensions because of the cost of such a mandate. This is also something CEA officials said the union would oppose.

The No. 2 item on COST's legislative agenda for 2019 is reject efforts to shift pension costs to municipalities. Top Democratic and Republican lawmakers, however, split on the question during a panel discussion at COST's annual meeting earlier this month.

"I think at a minimum they should be paying the normal cost, which is the cost due to their teachers today," said Rojas, the House chairman of the finance committee. "I understand they don't want to pay the bill for the decisions made by other people."

Support appears to be coalescing around recommendations to assign state lottery proceeds to the Teachers' Retirement System, retiring the 2008 bonds early and reamortizing the unfunded liability to stretch out and reduce annual payments, and possibly lowering the assumed return on long-term investments.

"All options that are politically difficult to do, but they all should be looked at," Rojas said. Lamont campaigned on using lottery receipts to shore up the pension fund, and he said he continues to support the idea. The proposal has bipartisan appeal. The CEA also supports this proposition.

A 13-member Pension Sustainability Commission is preparing recommendations for how lottery and other state assets might be utilized to support the retirement fund. Commission members voted to support both concepts at its most recent meeting. Its final report is still months away.

Lamont also favors paying of the 2008 bonds early at the first opportunity and then reamortizing the remaining unfunded liability — something else he embraced as a candidate.

"I've got to work on that bond covenant that they put into place in 2008, and make sure we don't have to pay this whole thing off in the next 10 years, but we have a longer period to do that," he said.

This is another proposal that enjoys bipartisan support.

The CEA has advocated for a refinancing plan that restructures future payments without paying off the 2008 bond issue before its maturity date.

"We're not necessarily looking at retiring the bonds. We just wanted the bonds to remain in place, but allow for the reamortization of the debt and the fund," said Kaplan-Cho, the retirement specialist. "Our position is to the extent it can be done prudently and legally we support that, but that is an outstanding question still."

The current assumed rate of return on pension fund investments is 8 percent. There are recommendations to lower this rate.

Some have advocated going to 6 percent. Former Treasurer Denise L. Nappier recommended lowering the rate to 7.5 percent next year and then to 7 percent in five years. The CEA proposed setting a 6.9 percent rate.