Take Care of Pensions Now
Norwich Bulletin, December 30, 2018
By Robert Congdon, Preston’s First Selectman and a member of the Connecticut Conference of Municipalities Board of Directors.
Anyone who’s paid attention to Connecticut politics in the last few decades has seen the outsize role that pensions have played in discussion on why the state is in such a fiscal mess. It was recently reported by MSN.com that only three states in the nation are in worse shape than Connecticut with regard to unfunded pension liabilities.
Pension plans should be funded at 80 percent or greater. Connecticut’s State Employees’ Retirement System (SERS) is only funded at 36.9 percent according to the Office of Policy and Management. While it’s largely accepted that many of these problems have roots going back nearly a century, this issue will have major repercussions for future generations if we don’t take care of pensions now.
Research from the Boston College Center for Retirement Research (CRR) noted in a November 2015 report that lack of pre-funding to be a major component to the shortfalls we see in funding today. Both SERS and the Teachers’ Retirement System (TRS) “have promised benefits to their members since 1939. But the benefits provided by SERS and TRS were not pre-funded until 1971 and 1982, respectively,” the report says.
It goes on to say that “the many years of unfunded benefits accrued over that period saddled both systems with unfunded liabilities that today account for nearly $9.3 billion of the combined $26 billion unfunded liability.“
The rest of the shortfall, all $17 billion of it, comes from “inadequate contributions, low investment returns relative to expectations, and negative actuarial experience”— misfires from that past that have overestimated returns or didn’t factor in possible recessions.
How does the state begin to fix a problem that has compounded every year that it has gone unfunded or under-funded? Suggestions by the CRR included lowering the long-term assumed investment return and shifting payments and full-funding dates away from their legacy definitions. On the latter suggestion, it is worth a look at alternative solutions; in reality, it is these legacy definitions that got us here in the first place.
Years of unfunded benefits back to top
Most importantly, the report suggests that to “address the costs associated with years of unfunded benefits [Connecticut should] separately finance — over a long time horizon — the liabilities associated with members hired prior to the pre-funding.”
Jean-Pierre Aubry, Associate Director of State and Local Research for CRR, put a fine point on this problem during the Connecticut Conference of Municipalities’ (CCM) June meeting. Aubry showed that Massachusetts spends about 82 percent of their pension costs on legacy costs, because “most reforms have focused on new hires due to legal protections for current employees.”
These reforms for new hires — lower benefits, mandatory hybrid plans — have potential drawbacks. For instance, Aubry suggested that these reforms could limit the recruiting ability of governments. One such change in the state has a local Police Department publicly advocating for a change back to a traditional pension plan.
When it comes to pensions, the ability to hire and retain good employees is only one of the cogs in this wheel. The sheer numbers, the billions of dollars that will be spent to plug a hole created in the past, are enough to question the fiscal future of the state.
It’s hard to look at the inbound/outbound rate of the state, especially of millennials who have decided to move elsewhere in droves, and think that moving costs down the line is an especially good idea.
Getting the fiscal health of our state back on track and keeping it there will be a signal to businesses and residents both current and prospective. We can no longer kick this can down the road. We must address this problem now.