Okay, my poker metaphors could use work.
Last month, there was a deal made in Connecticut.
Tackling one of the state’s biggest problems, Gov. Dannel P. Malloy and state employee unions announced an agreement Friday to restructure pension payments in order to avoid continuing fiscal problems in the future.
The deal was reached after months of behind-the-scenes talks regarding the funding calculations as the state was facing potentially huge future pension payments and tried to “help avoid the fiscal cliff the state would otherwise face in the coming years,” the administration said.
The agreement, which still requires approval by the state legislature, was not designed to change any benefits for current or retired state employees. Instead, it was crafted to make sure that the state could have more predictability in funding the pension system in the coming years — by restructuring the system and extending some payments over an additional 14 years.
Republicans blasted the deal as inadequate, saying state employees did not make any sacrifices and will not be paying more into their pensions. Critics have complained about highly lucrative pension benefits for state employees, which sometimes top $100,000 per year.
“If anybody wants to turn this down, feel free to do it,” Malloy said of Republican legislators. “If that’s their solution to a $6 billion balloon [payment], to turn down something that would cap it, if that’s their solution, God bless ‘em. I would hope that’s not their solution.”
The state’s business community, including General Electric Co., has been concerned about the state’s unfunded pension liabilities for years. Lawmakers said that GE executives were concerned the state had not done enough to solve the problem and decided to move the Fairfield-based company last summer to Boston for that and other business reasons.
After initially telling The Courant that “I don’t think it has anything to do with GE,” Malloy circled back to the issue minutes later when talking to reporters Friday at the Capitol.
“I very much had that discussion with GE,” Malloy said. “So when I said I don’t think it was a factor, it was because I subsequently learned that they were working on it for years before and they were rewarded with $160 million for 200 jobs” to move the headquarters to Boston.
Ben Barnes, Malloy’s budget director, said the state now will be on track to pay off $4.3 billion in unfunded pension liabilities by the year 2032 and then “resolve the remainder of the unfunded liability by 2046” — 30 years from now.
The plan is designed to create a new, three-decade payoff schedule with payments in the range of $1.5 billion to $2.3 billion. In the current fiscal year, the state is paying $1.6 billion into the pension fund, up from $826 million when Malloy became governor.
Where would they get the idea that reducing contributions while making no changes in underlying benefits leads to long-term solvency?
The Center for Retirement Research at Boston College released a report last year on Connecticut’s State Employees Retirement System (SERS) and Teachers’ Retirement System (TRS) that suggested giving the state more time by:
separately financing – over a long time horizon – the liabilities associated with members hired prior to pre-funding,
shifting to level dollar amortization of unfunded liabilities,
replacing the 2032 full funding date with a reasonable rolling amortization period, and
lowering the long-term assumed investment return.
At the time, after reviewing the situation with the SERS and TRS plans, I dismissed the report as a cynical disregard of reality to pander to political expediency. Apparently that’s exactly what Connecticut officials were looking for.
Malloy, unions strike deal to stretch out spiking CT pension costs
Gov. Dannel P. Malloy announced a deal Friday with state employee unions that would allow Connecticut to dodge a fiscal iceberg by holding down annual pension costs otherwise set to spike over the next 16 years.
But to get that relief, Connecticut would shift at least $13.8 billion in estimated pension expenses owed before 2032 onto a future generation.
Under the deal, the state still would pay hefty pension bills for the next 16 years, with annual costs rising from $1.6 billion to $2.2 billion over that period. But pension expenses that were supposed to drop as low as $300 million per year after 2032 would hover close to $1.7 billion in the 2030s and 2040s.
The plan allows the state to spread pension fund investment losses or gains deeper into the future. This would make pension costs less volatile. But if Connecticut consistently struggles to make its investment targets, annual costs could rise beyond targeted levels.
The agreement, which echoes some aspects of a plan Comptroller Kevin P. Lembo unveiled in January, also calls for the State Employees Retirement Commission to adopt a more conservative, 6.9 percent return on state investments to better reflect current financial markets.
The State Employees Bargaining Agent Coalition’s governing board ratified the deal on Thursday. The matter still must be considered by the General Assembly.
On paper, Connecticut’s annual contribution to the state employees’ pension – currently $1.6 billion – would rise to $3.3 billion over the next 16 years. But that hinges on pension investments achieving, on average an 8 percent return, which state officials, economists and others have said no longer is a realistic assumption.
Gov. John G. Rowland struck deals with unions in 1995 and 1997 that allowed Connecticut to defer significant contributions annually. (Malloy and the unions undid those deals and went back to full pension funding in 2012 and have made full payments every fiscal year since.)
Five times between 1989 and 2009, the state paid senior workers incentives to retire early — which eased pressure on the budget but drained extra resources from the pension fund.
The state traditionally has assumed returns of 8 percent or more on pension fund investments. But since the last recession ended, critics in financial services and academic circles have recommended much smaller targets, generally between 3 and 5.5 percent, pointing to the yield on long-term U.S. Treasury bonds.
I am so looking forward this being taken out of my hide as someone who works and shops in Connecticut.
SUPPORT FROM THE POWERS-THAT-BE
So let’s see what various people have to say. Unsurprisingly, the state comptroller who originally recommended many aspects of this deal, says Without Deal, Pension Costs Will Crush Us:
Gov. Dannel P. Malloy and the State Employees Bargaining Agent Coalition recently agreed to restructure the state’s pension payment plan in an attempt to stabilize ballooning costs over the next 16 years. Politicians and pundits weighed in — with some hailing the agreement as a panacea and others deriding it as ineffective.
I urge everyone to learn all of the facts before reaching a conclusion, because this issue is too complex for soundbites and social media warfare. The people of Connecticut are intelligent, and need their leaders to treat them like adults who can understand the problem.
Here are the facts:
In 1992, the state created a plan to pay its unfunded pension obligations by 2032. The payment plan was flat and predictable — like a fixed-rate mortgage. In the mid-1990s, however — when the state enjoyed consistent surpluses — government decision-makers negotiated an agreement to lower the annual pension fund contributions. But this meant payments would sharply increase in the distant future, like a balloon mortgage.
That distant future is now.
Funny how that keeps happening.
But do go on, Comptroller Lembo:
At the worst time, while we continue to claw out of recession, the balloon payments have arrived and are scheduled to get precipitously bigger each year. The cost of paying for benefits earned this year is slightly under $300 million. When combined with the cost of those decades of deferred payments and other shortfalls, however, the cost for us in 2016 was more than $1.5 billion.
That annual payment could grow from $1.5 billion to nearly $6 billion in a single year by 2032.
Last year, Gov. Malloy proposed a reform of the state’s unfunded pension liability. Treasurer Denise Nappier and I commended him, but expressed concerns about components of his plan.
My staff and I spent a great deal of time researching and analyzing this issue, and consulted with actuaries about best practices before submitting my plan. Treasurer Nappier did her own work as well and, ultimately, we all pooled our ideas.
While Gov. Malloy and I don’t always see eye to eye, his deal with the State Employee Bargaining Agent Coalition incorporates many of the essential components that I advocated, including replacing the unsustainable rising balloon payments with more stable and predictable annual contributions, drastically reducing payment volatility and adopting a more conservative long-term rate of return assumption. Gov. Malloy should be commended for taking another step forward in solving our pension crisis. His administration, to its credit, has made the full recommended annual pension payments. Changes that they previously negotiated to new employee benefits will help drive down future costs.
The only thing that can drive down actual pension plan costs is to REDUCE THE BENEFITS.
That’s not what this deal is about.
Republican leaders, including Sen. Len Fasano of North Haven and Rep. Themis Klarides of Derby, raise two important points.
First, they note that the agreement does not address pension benefit design — including whether incorporating overtime in pensions or other calculations should be changed. This is a fair question, but I would caution them against rejecting this agreement on that basis. If the state eliminated the pension system, and every Connecticut employee left tomorrow, the state would still owe these billions in unfunded pension costs. Why kill this agreement when a separate conversation can be had about benefit design?
That has nothing to do with anything.
All you guys are doing is changing a planned schedule of payments, when that original schedule was never intended to be met to begin with.
This is exactly like what will happen when we’re facing the “automatic” Social Security cuts when the fictional Trust Fund runs out. No, they won’t “automatically” get cut, because Congress never intended them to automatically get cut. Just like cuts to Medicare, they’ll just negogiate whatever the hell they want and point to the “automatic” cuts as a cudgel.
Similarly, they’re not even doing a real refinancing. It’s just changing the accounting and calculating of estimates.
The credit rating agencies endorse this action. The business community has demanded action. I urge the legislature to save Connecticut from financial devastation and adopt this agreement.
Fine, but it doesn’t fix the problem at all.
The second area I’d like to talk about are the obligations we have to Connecticut’s state workers, educators, and retirees.
Connecticut’s state pension systems were created 80 years ago, but not a single dime was deposited into the account during the first 30 years of its existence. It was a pay-as-you-go system.
Over many decades, legacy costs, insufficient contributions, lower-than-assumed returns, and early retirement packages left us with a significant unfunded liability in the state’s employee and teacher retirement systems.
The stark reality is that, after 80 years, the state has set aside only one-third of the money necessary to responsibly fund its obligations.
Let me put it in context. Of the $1.65 billion that we will pay next year into the state retirement systems, 78 percent of that – or nearly $1.3 billion – is what we’re paying to make-up for what past administrations and past legislatures failed to do.
Simply put, our generation is paying for Connecticut’s past mistakes.
Is it frustrating to do that? Of course. Is it necessary? Absolutely.
It’s also the right thing to do. Our state retirees dedicated their lives and careers to public service. We need to pay them the pensions they were promised.
Let’s also acknowledge and thank today’s state workers for their efforts in support of Connecticut residents and businesses. In 2011, we worked at the bargaining table to help put Connecticut on a more sustainable fiscal path. Together we changed benefits, reduced longevity pay-outs, restructured state pensions, raised the retirement age, and required all employees to pay for a portion of their post-employment benefits.
We saved the state $1.6 billion on our unfunded liability in the immediate two years following that agreement – and a total of $21.5 billion over the following 20 years. Had we not realized that level of savings, our current $1.5 billion projected deficit would be much, much worse.
Since making this agreement in 2011, the state has honored its commitment to fully fund the pension obligations each and every year – finally doing together what should have been done for the prior 80 years.
Building upon these years of work, my administration recently came to a crucial agreement with our state employees and our retirement commission, an agreement which will make our pension payments more affordable, and yes, more predictable.
Independent analysts are taking note. Moody’s Investors Services, a national credit rating agency, deemed this to be ‘a credit positive’ step for our state. And the plan’s actuaries say these changes will ‘enhance the stability’ of our pension system.
I urge you to support these important reforms.
Today, despite all this hard work and real progress, it’s clear we have more work to do to make our short and long-term labor obligations more affordable.
Fixed costs continue to increase every year, hampering our ability to maintain vital public services. Pension obligations for both state employees and teachers are on track to cost the state an additional $360 million in the next fiscal year compared to this current year. Clearly, the fiscal challenges we face during the next biennium are very real.
In the weeks ahead, my administration will continue working with labor leaders to find solutions for bringing employee costs in line with our economic reality. These talks have been frank and direct so far, and I’m appreciative that state workers are taking part in them.
It’s very hard, but we must reach an agreement on how to make our pensions and benefits more affordable, as we face these fiscal challenges together. We must recognize that a responsible and balanced solution to our budget problem is one that includes state employee concessions.
These changes can and should be reached respectfully, and at the bargaining table. Our state must honor its legal obligation to our public servants and state retirees, while at the same time keeping our promises to Connecticut taxpayers.
Here’s another promise: We will not remake the poor decisions of the past. We will not saddle future generations with fiscal cliffs and unpayable fixed costs. Responsible changes must be made — and they must be made this year.
Okay, so you’re admitting that you won’t budge on trying to make the pensions actually cheaper. You just want to change the payment plan.
THE ACTUARIES SHOW THIS DOESN’T MAKE THINGS CHEAPER
Future payment scheme takes a heavy present toll on state pension fund
State officials were shown the stark consequences Thursday of a new plan to defer making billions of dollars in state pension contributions until after 2032.
The latest valuation of Connecticut’s state employee pension fund, which assumes the plan pending before the legislature would be ratified, shows it would push the fund into its worst fiscal shape in three decades.
The State Employees Retirement System would have enough assets to cover just 35.5 percent of its long-term liabilities, marking the first time it has dipped below the 40 percent mark since the late 1980s.
Two years ago the fund was dangerously low with a 41.5 percent funded ratio. Fund analysts typically cite 80 percent as a healthy ratio.
Yes, yes, I know. Keith Phaneuf is my worst offender on the 80% funding hall of shame. I will ding him for this one later.
But Gov. Dannel P. Malloy’s administration, which negotiated the deal, said the alternative remains worse – to attempt to pay annual pension contributions that otherwise might quadruple over the next 15 years.
The actuarial analysis prepared by Cavanaugh Macdonald Consulting of Kennesaw, Ga., attributes the latest decline largely to a new plan to restructure the state employee pension system to limit spiking state contributions over the next 15 years. To do that, Connecticut would shift at least $13.8 billion in costs into future taxpayers, and possibly more.
The report also showed that despite Malloy’s efforts to shrink the state’s workforce, the number of pension fund participants has grown, both in number and in average pay, over the past four years.
The pension benefits, if unchanged, require whatever cash flow at the time the benefits are to be paid.
If you can’t afford to pay for benefits already accrued because you underpaid so much in the past, continuing to underpay now will not make these already accrued benefits cheaper in the future… especially as additional benefits get accrued in the future.
McClure noted that the new agreement also reduces the assumed annual return on fund investments from 8 percent to a more conservative 6.9 percent.
Yes, this is some of the reason for it to look bad, but a big part is back-loading payments.
The way they got to where they are today (“OMG! Ballooning payments!”) is because they pushed off necessary payments … just like they’re proposing now.
Now the particular pushing off could be less egregious than the prior plan, but this is not actually making the pension benefits more affordable to the state. The new payment schedule is pretty much the “fix” done before.
(Other than my own, obviously)
Connecticut Governor Calls for Budget Discipline Amid Fiscal Woes
Dannel Malloy presses for union concessions on pensions and changes in state education spending
HARTFORD—Connecticut Gov. Dannel Malloy Wednesday called on state labor unions to make concessions to help close a $1.5 billion budget deficit and also called for changes in how public education is funded in the state.
In his annual state of the state address, Mr. Malloy, a Democrat, said pension obligations for state employees and unions would rise by $360 million in the fiscal year that begins in July and pressed public employees to help close the state’s funding shortfall.
“These changes can and should be reached respectfully, and at the bargaining table,” Mr. Malloy said. “Our state must honor its legal obligation to our public servants and state retirees, while at the same time keeping our promises to Connecticut taxpayers.”
The call for unspecified concessions from state employees were part of a call for a shrinking of the state government generally because, as the governor said, the state “can’t afford to continue doing everything we’ve done in the past.”
I bolded the key word: “unspecified”.
I have never heard one whit from Malloy about reductions to pension benefits or even OPEBs. I will believe that he’s actually asking for pension concessions when he ever gets around to asking for pension concessions.
The other parties are pretending he actually is going to propose concessions:
Republican lawmakers said they were cautiously optimistic and were reassured by the governor’s address and his call for greater predictability in the state’s finances.
“He must have taken the House and Senate Republicans playbook,” said Republican House Minority Leader Themis Klarides. “I hope that he will stick to that.”
The Connecticut Business and Industry Association applauded the concession proposal and Democratic Senate Majority Leader Bob Duff said the state doesn’t have many other options. “If there aren’t concessions, there will be more layoffs,” Mr. Duff said.
Labor officials, however, said the state should consider raising taxes on the state’s wealthiest residents before considering asking public employees to make concessions.
Oh dear god, not this shit again.
Here, let me remind you: from March 2016 the CT employees demand the rich be taxed!
That came two months after GE said they were moving their HQ from CT to Boston. (that was mentioned in the pension wrangling above, too)
But hey, let’s get back to these outsiders.
At least one of the four Wall Street credit rating agencies is saying the proposed changes to the state employees pension system approved last week by Gov. Dannel P. Malloy and the unions is “credit positive.”
The report from Moody’s Investors Service can’t be viewed as a credit upgrade, according to the disclaimer, but it’s a positive sign for a state with the highest fixed costs in the nation.
In a report released Thursday, Moody’s Investors Service noted that the new agreement “sacrifices the goal of amortizing the unfunded pension liabilities over a shorter period, but allows for more affordable pension contributions and a more conservative investment return assumption.”
Without a deal in place, the annual state contribution to the pension fund would have to exceed $6 billion. In order for the state to meet those obligations, it would have to drastically cut services and/or increase taxes to unprecedented levels. The state’s annual contribution to the pension fund is already $1.5 billion. Under the new agreement it would increase at the most to around $2.3 billion annually.
What BS. Without the deal in place, the state would just contribute whatever the hell it wants to. You know, the way New Jersey does.
Gov. Dannel P. Malloy was praised by the Hartford business community Monday for the agreement he reached last week with a union coalition to avoid a spike in pension payments for state employees.
Webster Bank Chairman and CEO Jim Smith said businesses want stability and the pension agreement helps move the state in the right direction.
It’s not necessarily a celebration, according to Smith, because the annual contribution to the pension fund will increase over the next few years, but not by as much as it would have if nothing was done.
“It is a bullet dodged,” Smith said. “It’s an indication of just how deep the hole is we all want to dig out together.”
Smith made his remarks at the MetroHartford Alliance Rising Star Breakfast at the Hartford Hilton Monday morning.
I mean, I guess that bullet will be coming back in a decade, but maybe you’ll be gone by then.
In January, the newly elected Connecticut legislature will have to consider whether to reduce the amount of each annual payment due into the state’s pension fund from 2017 through 2032. To achieve full funding under current law, the state has to make up deficient payments to the pension fund by paying the required amount plus an increasing catch-up amount every year until 2032. The current schedule would result in the pension fund being fully funded by 2032. The new agreement would defer $13.4 billion of the catch-up amount and add it to the amount payable to the pension fund after 2032. However, such a new schedule would delay the full funding of the pension fund by an additional 13 years, to 2045.
Why would the state do this? So that it can have less pressure on the budget for current years. That would be the ultimate “kick the can down the road” maneuver. In 16 years, when a new payment schedule would have to be adopted, it would be another governor’s problem, and most of the legislators voting on the issue now will have retired to collect their pensions.
Exactly. The deal does nothing but push off the costs til tomorrow.
Puts me in mind of a song…
The fund will be paid
Bet your new tax dollars that
There’ll be pensions
I Love ya
You’re only 30 years away……
Or 25 years. Whatever’s good for you.
Back to the law-talking types:
Unfortunately, under current law, when the governor negotiates a contract with the unions, including changes in the pension program, the agreement is submitted to the legislature, which has 30 days to reject it. If the legislature fails to take action, the contract automatically goes into effect. Historically the legislature seldom rejects union contracts. Legislative leaders never bring the contract up for a vote, and failure to bring it up allows the change to become effective after the 30 days, while allowing legislators to say that they didn’t vote for it—even though their inaction resulted in its passage.
And that 30 days is going to be up soon.
A VERY EASY PENSION REFORM TO PASS
Or it should be.
While relatively small with respect to CT pensions in general, there’s a pension perk that would make a great symbolic target to show that the CT legislature is really serious about reining in pension costs — the padding of legislative pensions with mileage driven:
Legislators, Stop Padding Your Pensions
Legislators cheat taxpayers by padding their pensions with mileage reimbursements. They should stop feathering their retirement nests this way. It’s unfair to ask constituents to pay for perks most don’t get themselves. And it’s wrong for legislators to get such perks while the state is in financial crisis.
Courant columnist Kevin Rennie has railed against this freebie for years as a former Republican state senator who never claimed mileage reimbursements. Trumbull First Selectman Timothy Herbst took up the torch recently, looking at the mileage reports of a handful of Democratic senators. (It should be noted that legislators on both sides of the aisle have taken advantage of this fringe benefit.) Mr. Herbst found that Sen. Joseph Crisco Jr. had been reimbursed more than $105,681 over a decade before losing his re-election bid last November.
Like Mr. Rennie has for years, Mr. Herbst does raise needed questions about this state perk (which we hope he researched on his lunch break). In a state deep in debt and facing overwhelming pension obligations, should legislators be feeding at the public trough this way?
According to a USA Today story from 2011, “Connecticut lawmakers can increase their pensions up to 50 percent by including mileage reimbursements that add as much as $15,500 a year to the salaries used to calculate their pensions.”
USA Today did the numbers for the House Republican leader at the time, then-state Rep. Lawrence Cafero, who commuted from Norwalk (and worked at a nearby Hartford law firm). It found that the expense payments, mileage and leadership stipend that Mr. Cafero received in 2008-10 would add $26,341 to the $28,000 salary used in his pension calculation.
Some other legislative employees get this perk as well. Former state auditors Robert Jaekle (a Republican) and Kevin Johnston (a Democrat) are enjoying generous state pensions ($153,828 and $179,712, respectively, in 2015) in part because they could add thousands of dollars in mileage to their pension calculations, as Courant columnist Kevin Rennie first reported in 2011.
Lawmakers should drop this perk.
Man, I drive ~35K miles per year, 90% of that commuting for my job(s). If only that could have been turned into pension credit.
But that excrescence of a legislative perk needs to be dropped, and pour encourager les autres, they should drop it retroactively. (Yes, I know there would be legal issues, but come on! It’s the Trump era now! Even before he’s President!)
Here’s the column by Rep. Herbst pointing out the hypocrisies in all this. And here is the item indicating just how likely “concessions” will be coming:
A paid employee of AFSCME, which represents 15,500 state workers, is about to be elected the next Speaker of the House of Representatives in Connecticut — at a time when multiple labor agreements will be up for re-negotiation.
In 2014, Governor Malloy nominated — and the legislature confirmed — two lawyers to become judges, who will serve less than four years and receive pensions in excess of $100,000. How can we expect our leaders to solve our fiscal problems when they are among the most chronic abusers of a mendacious system that places Connecticut taxpayers at the back of the line?
Just as Governor Malloy and the majority party have passed on $13.8 billion to future generations to pay for, one thing is clear. The state of Connecticut is ready for a new generation of leadership.
When not at the legislature, Joe is the Education Coordinator for the American Federation of State, County, and Municipal Employees Council 4.
Alas, no comment on whether that fringe benefit is the mileage boost for pensions.
SAME AS IT EVER WAS
And how is the latest deal likely to turn out?
In the first partisan fight of 2017, Democrats in the House of Representatives blocked a Republican proposal Wednesday that would have ended a longstanding practice of approving state employee contracts without a vote.
The House voted 76-72, along party lines, to reject a rule change that would have required the chamber to cast ballots on all contracts, amendments and other agreements subject to collective bargaining.
My guess: there will be no vote on the deal. The Democrats currently run the legislature and do not want to officially be on the record supporting this deal, which would be really inconvenient come the next election.
But back to the commentary:
Even if the House doesn’t agree to vote on labor contracts this session, ballots may be cast in another chamber.
The Senate had operated under a rule similar to that of the House when it came to labor contracts. But after Republicans gained seats during the last election, the chamber’s membership now is split evenly between the two major parties.
Leadership there reached a bipartisan, power-sharing agreement that would allow either side to bring labor contracts to a vote in the Senate.
So maybe the Senate will vote. But it doesn’t matter. Looks like it will be a done deal, by default.
Funny word, default….
If you’d like to see all my Connecticut posts, you can find them in this compilation.
Connecticut Pensions: Pushing Off Payments Til Later Ain't Reform
Nevada Pensions: Asset Trends
Welcome to the Public Pension Watch: Hurray for New Jersey!