STUMP » Articles » A Look at CT Teachers Pensions: Cash Flow Projections » 23 February 2020, 18:48

Where Stu & MP spout off about everything.

A Look at CT Teachers Pensions: Cash Flow Projections  

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23 February 2020, 18:48

In my prior post on CT pensions, I mentioned CT was looking at a toll on a one-mile portion of a interstate highway.

Well, they’ve scrapped all the toll plans, for now. They’re talking about borrowing money for road improvements, which sure, those could be seen as capital improvements… I want to see one item quoted:

Hartford Mayor Luke Bronin — a tolls supporter — said he fears the failure of the governor’s plan could jeopardize the state’s economic health by siphoning money that could have been generated by out-of-state trucker from other worthy projects.

“To the extent that we, as a state, had an inability to do what every state in our region already does, could, I fear, be putting all of those priorities at risk,’‘ Bronin said. “We have to be willing to work together, across party lines and [from] cities and towns, big and small, to invest in those areas that are critical to Connecticut’s economic future.

Yes, yes, the “let that OTHER guy pay the bills” is so popular as a financing move, but the real reason it did not win is that people know that the tolls would soon be extended to non-out-of-state truckers.

I did search in the article on the death of tolls for the word “pension”. Not there.

But it is a concern in the budget.

FOCUS ON TEACHER PENSIONS

The pensions still hang heavy over the state, even if it wasn’t mentioned in the articles. Let’s start with the worst pension plan in CT (at least on a state-wide level): the teachers’ fund. To be fair, because of a variety of reasons, teachers pension plans tend to be the worst-funded plans in any state.

Connecticut has a similar set-up as does Illinois: a state-based pension fund for the teachers of the state, though local districts have different salaries, etc., for those teachers. The contributions come from “the state”, which just means all the taxes the Connecticuters are already paying, plus revenue from unfortunates like me, who work and shop in the state.

The information for the CT Teachers Plan from the Public Plans Database can be found here.

In this post, I will look at some simple cash flow projections using my cash flow spreadsheet.

CONNECTICUT TEACHERS RECENT STATS

To begin with, let’s check on a few cash flow stats.

Evidently, there are no expense items in the reports, which is why it says “insufficient data” on that one.

Secondly, the weird number for the 10-year contribution rate growth is because in FY2008, CT did a pension obligation bond for CT Teachers. That’s what I consider a fake contribution, so it’s not a fair comparison.

But then there’s the 8.3% growth rate for contributions in the past 5 years…. this is not really sustainable.

With an 8.3% per year compound annual growth rate (and it’s more than that), the contributions increase almost 50% in a 5-year period. That’s quite a steep ramp.

That the benefit cash flows grow 4% per year for the past 5 years, and 4.5% for the past decade, are not quite so bad. (Not as bad as 8.3% per year, that’s for sure)

Finally, the investment returns are a bit lower than their peers.

ZERO LEVEL PROJECTION

Let’s check what happens with cash flows and asset levels if contributions, benefits, etc. all stay at 0%.

So obviously, the cash flows don’t change (and investments don’t do anything).

And the asset levels slowly go down (also, not a surprise).

FUND FAILURE PROJECTION

I am not doing a thorough exploration of “parameter space” in this post. That is, I’m not looking for combinations of contribution growth rates, investment returns, etc., to see where the fund grows versus where it runs out of cash.

I’m just trying out a few examples.

Given that one already sees the fund slowly going down in the “hold the cash flows steady” scenario, let’s just have the benefit cash flows increase by 4% per year (matching the 5-year statistics), and hold all else constant.

How does that work?

The assets:

Well, that’s to be expected under this very contrived scenario.

But I want to show you something — the cash flows:

In specific, look at the huge bump-up in “extra contributions” to allow for the fund to continue on a pay-as-they-go basis. They have to more than double.

Here is a separate failure scenario: I’ll have the contributions increase at 3% per year, benefits increase at 4% per year. That’s not a big disparity, right?

Asset level:

Note: that is simply a one percentage point difference, and assuming no investment income. But I’m also assuming no big drops in the stock market.

I will come back to that at the end of this post.

MATCHING THE STATS

The 10-year stats are stupid because of the pension obligation bond. So let me match the 5-year stats.

Here are the asset projections:

Woo! That’s awesome! Exponentially growing assets!

Let’s check what our cash flows are doing:

Mmmm, that’s positing contribution levels growing to $3.5 billion in FY2028, and they contributed only $1.6 billion in FY 2018. And supposing a $7.8 billion contribution in FY2038.

How likely do you think that? Given that they were contemplating tolls on a one-mile stretch of a highway that’s almost entirely in New York?

I think they will be hard-pressed to increase contributions by 4% per year, forget about 8.3% per year.

WAITING FOR A MARKET DROP

As noted above, I didn’t “explore the parameter space”.

I did not try out say, oh, a market drop as we saw at the end of 2008. Or the market drop seen over 2000-2002. Or other drops.

I want to remind everybody, we are now on year 11 of post-recession U.S. We have never had such a long stint of economic growth in U.S. history. This is not going to keep growing indefinitely.

So let us think: they are not going to be able to keep increasing contributions by 8.3% per year.

Market returns are unlikely to increase in the short term. [For me, 10 years is short term. 100 years is long term.]

Are they just hoping a Magic Money Fairy will keep things bubbling up? Or do they hope that they will be gone before the really bad problems hit?

A TWEET TO THINK ABOUT

From one of my fave CT public finance tweeters, Cliff Fiscal:

I have something to say about Elizabeth Bauer’s piece on the moral issues of pension reform. But I will say it later. It goes beyond Illinois, obviously, and it goes beyond CT.

But my main point is: people need to realistically project what may happen in the future. Political hot air is not helpful.

What I showed in this post is fairly artificial, because it posits constant behavior, whether increase in benefit payments, investment returns, etc. I can project using more complicated assumptions, but I think people who get paid to do this should be doing that.

I feel many key stakeholders are ignorant and/or delusional about likelihoods.

I know taxpayers just don’t know. Most of us are just looking at the next tax bill. In a representative democracy, we are voting for people who are supposed to be responsible for checking on things and doing the planning.

The politicians… well, hmmm. I will link to this post from two years ago. I would say the vast majority of them are deliberately ignorant. I highly recommend they get another line of business.

As for the public employees? This is from 2016:

As much fun as it is for an East Coaster to beat up on Chicago, let me pick up something going on just a few blocks from where I work in the day time. (as opposed to where I work on some evenings)

I heard tell that CT’s revenue got a whack because one of the big taxpayers they’re so dependent on left the state.

State employees demand that there be no layoffs:

“Hundreds of unionized state employees rallied Tuesday morning on the north steps of the Capitol, demanding that Gov. Dannel P. Malloy and legislators abandon plans for layoffs and calls for wage and benefit concessions.

“The workers, who do various public safety jobs, also insisted that officials levy higher taxes on the wealthy and major corporations to close huge looming deficits in the next two state budgets. Union officials estimated that about 500 workers attended the rally.”

The various public employee unions in CT think they can keep raising taxes… on those OTHER guys. No, they will not recognize that CT is dependent on too few very rich people.

Connecticut is in for a lot of fiscal pain, and it would help if we had some realistic numbers to work from.


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