Connecticut Ranks 5th-Worst In U.S. In Funding State Employee Pensions
February 18, 2010
Connecticut ranks as the fifth-worst state in the nation in funding pensions for its state employees, and the problem is growing worse, according to a national study to be released today.
The report says the problem is "cause for serious concern."
Connecticut's pension fund is only 62 percent funded, far short of the 80 percent that federal experts deem as preferred. The only states ranked lower than Connecticut are Illinois, Kansas, Oklahoma and Rhode Island.
If left unchecked, the growing unfunded pension liability could eventually force states such as Connecticut to either raise taxes or cut services in order to pay for the pensions that are mandated under union contracts. Though currently underfunded, the pensions must be paid.
"The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms," said Susan Urahn, managing director of the Pew Center on the States, which issued the report.
Since the state legislature and governors have not set aside enough money through the annual budgeting process, the state's unfunded pension liability has increased by more than $9 billion since 2000. Connecticut's pension fund grew by 89 percent between 1999 and 2008, the report says, but the liabilities — the amount the state owes to the pensioners over the long term — grew even faster, essentially doubling.
The nonprofit Pew Center on the States said, "Connecticut's management of its long-term pension liability is cause for serious concern, and the state needs to improve how it handles the bill coming due for retiree health care and other benefits."
Concerned about the state's growing benefit problems, Gov. M. Jodi Rell announced on the opening day of the legislative session that she would create the Post-Employment Benefits Commission, which will recommend short- and long-term solutions for the pension system. Rell's office on Wednesday said the state's pension system is currently underfunded by $9.3 billion.
In addition, the state is on the hook for future health insurance and other retiree benefits of $24.6 billion.
"The state of Connecticut has a commitment to its workforce that must be honored," Rell said two weeks ago. "We cannot do that if we fail to meet our financial obligations to these accounts."
The new commission, which has already been created by executive order, will include representatives from the top state offices that are involved in solving the problem, including the state comptroller, treasurer, governor's budget office, actuaries, certified public accountants, and the state employee unions coalition, known as SEBAC.
Urahn said the 50-state report showed "highly troubling" findings nationwide with total liabilities of more than $3.3 trillion for pensions and health care that have been promised to state workers.
The problem has worsened in recent years as states have postponed contributions to pension funds. In Connecticut, Gov. John G. Rowland and the state legislature agreed to postpone payments to the pension fund in order to save money in the short term and balance the budget.
The problem, though, is that the savings are only temporary, because the amount of money state workers were scheduled to receive was never decreased. The legal, contractual amounts remained the same.
The practice continued under Rell as the state deferred a payment of $100 million under an agreement with the state-employee unions.
Nationally, more than half of the 50 states had fully funded pension systems in 2000, according to the Pew report. Eight years later, only four states — New York, Florida, Wisconsin and Washington — had 100 percent-funded systems.
Connecticut ranks among eight states in which at least one-third of the liability remains unfunded. Illinois is in last place, with 54 percent of its pension system funded, followed by Kansas at 59 percent. Rhode Island and Oklahoma are tied at 61 percent, and Connecticut is next at 62 percent.
"Too often, policy makers kick the can down the road," Urahn told reporters Wednesday in a conference call. "It is important to note that this problem was not created by the current recession."
Despite the low numbers, Urahn said states can solve the problem if they don't let it get even worse.
First, the states could start fully funding their pension obligations each year, something that often is not done. Second, they could reduce the overall liability by reducing the benefit levels. For example, Iowa in recent years raised the amount of money that must be contributed by state employees.
"Even small changes, made today, can have a significant impact in the future," Urahn said. "The consequences of inaction are simply too great."
Another way to cut costs is to eliminate the pension plan for new state employees and instead enroll them in a 401(k)-style plan that is common in the private sector.
R. Nelson "Oz" Griebel, who is seeking the Republican nomination for governor, has proposed such a system in his campaign. Griebel says he understands that there are contractual obligations for current employees, but he says the state should consider a different plan for new employees.
Two states — Alaska and Michigan — have already moved toward the 401(k)-type plan. In Minnesota, the state saved $650 million over 20 years by simply raising the retirement age by one year — from 65 to 66. That move, which was made in 1989, has proven beneficial through the decades, Urahn said Wednesday.
"If they wait, it's going to continue to get worse," Urahn said.
Reprinted with permission of the Hartford Courant.
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