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The State Budget and Structural Reform, Part 3

Aug 10, 2015
Editor’s Note: Throughout this year’s debate on the FY 2016 - FY 2017 biennial budget, the MetroHartford Alliance advocated for structural reforms that would establish a fiscal foundation supporting private sector job retention and growth as well as capital investment. In communications to policymakers and public forums on the budget, the Alliance continually stressed the need to adopt lasting, real reforms to bring sustainability to our state’s budget, such as those developed by the Connecticut Institute for the 21st Century. The Institute was formed in 1997 when public and private leaders in Connecticut came together to exchange ideas about increasing the state’s economic growth and competitiveness. The group focuses on informing policymakers on key issues that hold the most potential for the state’s future. 

We are encouraged that the budget implementer includes language that directs the Secretary of the Office of Policy and Management to review the reports of the Institute and submit recommendations to the Governor and the Legislature’s Appropriations and Finance, Revenue and Bonding Committees.

In the interest of providing more details on the structural reforms for which the Alliance has advocated – both those of the Institute and others – we are sharing regular updates with our Investors.


Reining In the Cost of Connecticut’s Pensions and Other Post-Employment Benefits

Connecticut, like many states, faces the worst fiscal crisis in a generation: managing the cost of retired state employee pensions and benefits. The funding crisis for pensions and other post-employment benefits (OPEB) facing many states is particularly burdensome for Connecticut as it struggles to manage a $47.2 billion unfunded obligation to retiring state employees. 

Under the Malloy administration, Connecticut is now working to fully fund its annual pension obligations. These laudable efforts notwithstanding, the accrued liabilities in the three major pension funds totaled more than $26.3 billion, meaning that the funds are now only 41.5 percent funded. In fact, our unfunded pension liability places Connecticut in the third worst position in the nation, behind only Kentucky and Illinois. Additionally, Connecticut's OPEB obligation to state workers, largely comprised of health care costs, is underfunded by $22 billion. This underfunding is nearly ten times worse than the national median of $2.7 billion in unfunded OPEB liabilities.

What steps can be taken to bring Connecticut’s pensions and OPEB system under control?

Considering the pension and OPEB fiscal crisis, Connecticut must use all means at its disposal to reduce its liability while maintaining a fair level of benefits for Connecticut state retirees and current employees. It is this balance between current employees and their potential benefits and former employees that is so difficult to achieve. Nonetheless, the Connecticut Institute for the 21st Century believes there is much to learn from other states’ actions and recommends that the Governor and the Legislature review them and take strong action on numerous fronts to bring our problem under control. 

Some specific programmatic changes that should be considered to reduce costs include:

• Implementing a hybrid or defined contribution plan effective immediately for all new employees
• Increasing the age at which employees are eligible to retire with full benefits
• Changing the averaging period on which retirement benefits are calculated from three to five years 
• Eliminating pension spiking by not counting overtime
• Not offering retirement incentive plans
• Delaying medical coverage for early retirees and beneficiaries until an employee reaches a specific age (such as 62) even if vested and eligible
• Eliminating cost-of-living adjustments and longevity payments

State leaders should also consider making changes to accurately reflect liability and remedy underfunding, such as:

• Requiring the State and municipalities to make the full annual required contribution (ARC) payment determined by its actuaries in accordance with accepted actuarial principles annually, based on third-party actuarial calculations
• Decreasing assumed rates of return and inflation to reflect more realistic and conservative expectations about the economy
• Eliminating the reductions in ARC payments negotiated in State Employees Bargaining Agent Coalition (SEBAC) agreements IV and V

To read the full report on reining in the cost of Connecticut's pensions and OPEB and other reports from the Connecticut Institute for the 21st Century, visit the Public Policy Resources section of the MetroHartford Alliance website.
 

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