Connecticut pension liability cost much greater, astronomical, says study
Wednesday, November 20, 2019
Kevin Maloney, (203) 710-3486
The Connecticut Conference of Municipalities (CCM) today (Wednesday, November 20) released a presentation on Connecticut’s state and local pension liability delivered to CCM member leaders recently by a national expert on this critical issue.
“Of the many aspects CCM’s Property Tax Relief Commission will cover, the pension crisis that has plagued Connecticut for years is one of the most challenging and problematic,” said Joe DeLong, CCM Executive Director. “CCM has retained Gordon Hamlin, President of Pro Bono Public Pensions, who is an expert on the subject. He assists numerous state and local governments in transiting to fair, secure, and sustainable solutions for their pension plans.”
In the presentation offered to CCM local leaders — see the link below for the complete presentation — Hamlin begins with this overwhelming question: Is the retirement crisis in Connecticut really as bad as everyone says? CCM would assert that the facts he presents speak for themselves.
Hamlin presented the collected group with a shockingly large number: $124,952,268,277. That is the sum total of Connecticut’s state and local unfunded pensions and other post-employment benefits (OPEB) as of June of 2018. Those numbers break down to $82.225 billion in unfunded state pensions and $14.297 billion in unfunded local pensions, with the remaining nearly $30 billion in state and local OPEB and pension obligation bonds.
He sought to present a comprehensive picture of retirement debt in Connecticut. The large state plans, using either 6.9% or 7% for discount rates, state a net pension liability of $39,053,677,567. Hamlin adjusted that data to reflect the average AA Corporate Bond yield for the six months ending June 30, 2018, to get a new net pension liability of $73,868,433,768 for the large state plans. Hamlin further noted that if you use the average AA Corporate Bond yield for the five years ending June 30, 2018, then the new liability becomes $82,225,208,159.
That's the difference between 3.28% and 2.6% as the discount rate. The other post-employment benefits (OPEB) local liability has gone up by about half a billion dollars since the last OPM summary. Instead of being 5.6% funded, it's now up to 7.4% funded, so some municipalities have been adding to their trust funds. Although the proper discount rate is a subject of vigorous debate between actuaries and economists, it's worth noting that the Federal Reserve makes its calculations by using a AAA corporate bond index, which normally would be lower than the AA corporate bond index Hamlin used.
CT is fifth worst back to top
According to Hamlin, as of 2016, Connecticut had the fifth worst ratio of assets to unfunded pension liabilities, per the Federal Reserve. Only Illinois contributes more for pensions per public employee and has a higher percentage of state revenue devoted to bonds, pensions, healthcare and defined contribution payments.
As many already know, the pension crisis did not happen overnight. In fact, it has taken nearly a century to get us to this point. Many plans were pay-as-you-go for years and years. Add to this poorly planned out decisions such as failing to make the full Annual Required Contribution (ARC), keeping much of the portfolios in cash resulting in low returns, not funding enhanced benefits, and deliberate decisions to push off the amortization date such as the State Employee Retirement System and Teacher’s Retirement System.
Additionally, bonds are currently paying out at a fraction of what they were ten, twenty, and thirty years ago. The stock market, though performing well, has shown a trend towards lower real returns. This has caused Vanguard, the retirement plan company, to forecast an underperforming stock market. As a former hedge fund risk manager noted in a Bloomberg article, if we look at portfolios like pension funds typically hold, but over a much longer 50-year time horizon, those portfolios have averaged a return of 7% on only two occasions over the past 100 years. Combine with that the real chance that there will be a recession in the near future, and the situation looks bleak.
This leads us to unenviable decisions: Is it fair to reduce pensions for current retirees? Expect current employees to boost their contributions? Expect current taxpayers to pay for the unfunded liabilities? Or, do you do nothing?
Pensions are a problem that have plagued Connecticut for decades. Hamlin’s presentation laid out the numbers. Yes, the retirement crisis in Connecticut is really as bad as everyone says. And the solution will not be met without taking a hard look at the facts, no matter how bleak.