STUMP » Articles » Connecticut Pensions: Pushing Off Payments Til Later Ain't Reform » 26 January 2017, 04:30

As I’m missing the Day of Action today….

FINE FINE. As I’m going to be sitting doing my insurance-y things a few blocks from the Day of Action people, I thought I’d look in on the CT budget and its pensions.

Ugh, I’m screwed.

WE’LL GLADLY PAY FOR THE PENSIONS….LATER

Budget panel backs deal to stretch out spiking CT pension costs

The legislature’s Appropriations Committee issued a dual-endorsement Tuesday of a new plan that would allow Connecticut to defer billions of dollars in required contributions to the state employees pension fund until after 2032.

Senators on appropriations endorsed it 10-2, while representatives voted 30-10 in favor. Because of a technicality in the way the legislature considers labor agreements, the committee’s senators and representatives have to vote separately on the deal. The votes represent only an endorsement, not approval, by the committee members.

…..
House and Senate leaders have said they expect the deal to be brought up for a vote before their respective members on Feb. 1.

But several Republican lawmakers who endorsed the deal, as well as a few Democrats, also encouraged Gov. Dannel P. Malloy’s administration to secure more traditional concessions from unions — such as higher worker contributions toward pensions, and reduced benefits. These changes, they said, would complement a deal that, while mitigating costs to taxpayers over the next 15 years, still would shift $14 billion to $21 billion in costs onto future taxpayers after 2032.

“Absent a holistic approach, I’m not sure we move the state forward with this deal,” said Senate Republican President Pro Tem Len Fasano of North Haven, adding he might oppose the deal on the Senate floor if traditional concessions are not forthcoming.

In recent years, House and Senate Republicans have recommended some new restrictions on the pension program, including:

Removing overtime earnings from pension calculations.

And requiring all workers to contribute 4 percent of their pay toward this benefit. Most state employees currently give 2 percent while some contribute nothing. The national average contribution for state employees is nearly 7 percent.

Two points:

1. The reduction in pension benefits has only been recommended. Nothing has been passed there.

2. The way they got into this mess was because of pushing off payments (decided decades ago). They’re doing it again… but there is a limit to how often they can do this.

YANKEE INSTITUTE: CT HAS A PROBLEM

Despite pension agreement, state still faces “relatively brutal” cost increase

Gov. Dannel Malloy’s budget chief told the appropriations committee Tuesday that, despite a pension agreement between the governor’s office and a group of state employee unions, Connecticut will face “a relatively brutal” increase in pension costs equal to 10 percent of the budget by 2023.

Office of Policy and Management Secretary Benjamin Barnes gave his remarks during a public hearing on the deal with the State Employee Bargaining Agent Coalition or SEBAC.

The pension deal would essentially refinance the existing pension payments by extending them through 2046 to make up for a $16.5 billion funding shortfall. The plan is expected to lock-in state payments into the system at $2.2 billion annually starting in 2023.

Beginning in 2032 the payments would drop to $1.8 billion and then $1.7 billion for the remainder of the plan.

Although not a part of the deal itself, the State Retirement Commission agreed to lower the discount rate from 8 percent to 6.9 percent. Greg Mennis of the Pew Foundation, testified that the discount rate change would bring Connecticut from one of the most “aggressive” states to “one of the lowest rate of returns in the country.”

Let’s pause for a moment. Pew is correct in terms of the discount rate – most public pensions are now sitting around 7.5% for their discount rate.

But what’s bad is that we’ve seen that the discount rate should be 6% or lower, given current economic conditions. Any public plans doing that?

Not many.

Checking out the Public Plans Database, these are the plans using something lower than 7% for the fiscal year 2015 valuation:

• Portland Fire and Police Disability Retirement Fund 4.29%
• Pennsylvania Municipal Retirement System 5.50%
• Wisconsin Retirement System 5.50%
• DC Police & Fire 6.50%
• DC Teachers 6.50%
• Vermont Teachers 6.50%
• Indiana PERF 6.75%
• Indiana Teachers 6.75%

Hmmm, looks like I should profile either DC or Indiana next. (And something weird is going on with Portland Fire & Police Disability Fund, so I will ignore it for now)

Oh wow, I found some weird stuff in the return assumption for Minneapolis ERF. I’ll need to check that one out later.

In any case, yes, at 6.9%, Connecticut would be using a rate lower than most other public pension funds.

Back to the Yankee Institute piece:

Mennis noted a stark difference between Connecticut’s labor laws and that of 46 other states because there is no state statute that shows how pensions are funded. In Connecticut the pension funding is set in the labor contracts negotiated behind closed doors between the governor and union leadership.

The legislature can vote down agreements made the governor, but they frequently pass up the opportunity because the agreements automatically go into effect if lawmakers don’t vote on them within 30 days.

The closed door meetings were a cause for doubt for Rep. Melissa Ziobron, R- East Haddam, who said she has “no faith” in the solutions presented because of the secretive nature of the negotiations. “I don’t know what is in store for the taxpayers,” Ziobron said.
…..
Suzanne Bates, policy director for the Yankee Institute, testified that although there were some positive things about the deal, such as lowering the discount rate and moving to a level-dollar payment, it did not constitute pension reform.

“We believe that our pension benefits are too expensive at this point,” Bates said.

Bates’ testimony drew a “visceral” response from Sen. Cathy Osten, D-Colombia, who repeatedly cut off Bates from responding and then walked out of the meeting. Committee chair-woman, Toni Walker, D-New Haven, remarked about Osten’s questioning that “none of us have the right to be that aggressive.”

Well, they do, if they want to. Why not question Bates?

BATES TESTIMONY TO THE CONNECTICUT GENERAL ASSEMBLY APPROPRIATIONS COMMITTEE

Rather than get this secondhand, filtered through other stuff, why not look at Bates’s prepared testimony?

Testimony on Senate Resolution 7
and House Resolution 8
Submitted by Suzanne Bates, Policy Director

January 24, 2017

Good morning Senator Formica, Senator Osten, Representative Walker and Representative Ziobron.

My name is Suzanne Bates. I am the policy director for the Yankee Institute for Public Policy, a Connecticut-based free market think tank.

I am here to discuss our views on the agreement between the State of Connecticut and the State Employees Bargaining Agent Coalition.

The agreement includes some positive steps forward, including lowering the discount rate from 8 percent to 6.9 percent. This gives us a truer picture of how expensive our past and current pension benefits are for taxpayers. However, the reduction does not go far enough. Our discount rate is supposed to be tied to the rate of return we receive on our pension investments, and yet for the past fifteen years we’ve averaged only 5.5 percent returns.

The federal government, under ERISA rules, requires that private pension plans have discount rates between 1.8-5 percent. This is to protect investors as well as beneficiaries. Why isn’t the state of Connecticut similarly protecting taxpayers? Beneficiaries of public pensions are automatically protected both because states can’t declare bankruptcy and because court opinion has weighed heavily in favor of protecting existing pension benefits. It would be much safer for the state to set a rate that valued future benefits honestly, and protected taxpayers from growing liabilities.

Another positive step is moving to a level dollar instead of a level percent of payroll amortization. This would provide greater stability for taxpayers in the long run.

We are concerned about shifting liabilities onto future taxpayers by extending the amortization period out over 30 years instead of 14.

Above all, I want to share our concern that this agreement is being misconstrued as “pension reform.” This is not pension reform. Under this agreement the state would essentially be refinancing its mortgage, but still living in a house that’s too expensive.

It goes onto propose some actual benefit reforms, and also include reducing the discount rate to 5%. But That’s enough from Bates for now.

METAPHOR FOR UNFUNDED PENSION LIABILITIES: CREDIT CARD BALANCE

I’m a bit tired of the mortgage metaphor everybody uses, because it’s a bad metaphor.

When you mortgage a house, you’re buying an asset at a point in time, but you’re going to be using it over a number of years. So you try to finance it over a reasonable amount of time, and it’s paid like a sinking fund. The principal balance reduces through the life of the mortgage.

But pension liabilities aren’t capital assets like a house. The accrue as benefits for services rendered in particular years. If you’re thinking of mortgages, it’s like you started putting the payments for cleaning services of your house on your mortgage.

Yes, some people have put short-term operating expenses (as opposed to capital expenditures) on things like mortgages and HELOCs. THIS IS A BAD IDEA. DON’T DO IT.

A better metaphor is that of the credit card balance. I’ve done this full rant before, which also ties into pension obligation bonds.

But pensions aren’t a capital asset/expense. They’re an operational expense. They are for paying for current service by giving some money in the future, but the expense is incurred right now.

Just like when I go out to a fancy restaurant and put that tab on my credit card. I usually pay off my balance in full each month for credit cards, because I use them to pay for my current, operational expenses like groceries, the energy bill, my Amazon habit. If all I did was keep charging operational expenses to my credit cards and not paying off the balance, I’d be accruing debt like the unfunded liability in public pensions. The credit cards don’t expect me to pay off all the balance all at once, but I don’t need to be still paying for today’s meal at Per Se for the next thirty years.

Credit cards are used for short-term purchases, and thus charge relatively high interest rates (ooooh, like 8%, say.) This deal is the equivalent of changing your payment schedule on your credit card, and also reducing the interest rate, in exchange for a large increase in the balance next year.

Okay, enough of these metaphors. Read my previous explanation.

OTHER TESTIMONY

Other than the mortgage metaphor, I totally agree with Bates.

But she wasn’t the only person to testify (at least in written form). Let’s check out some others.

Comptroller Kevin Lembo — excerpts:

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 at that time negotiated an agreement to lower the annual pension fund contributions. But this meant that payments would sharply increase in the distant future, like a balloon mortgage.

ARGH. Okay, back to the written testimony:

That distant future is now. 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. Compounding the problem is that Connecticut has, for many years, relied on a rosy assumption about how much the pension fund’s investments will grow each year (8 percent, when a lower assumption is more realistic and responsible).

…..
To those who like to evoke the age-old “kicking-the-can” metaphor, a sound bite that resonates when out of context, I urge you to consider this: The can has already been kicked down the road and now we’re staring down the barrel of a $6-billion balloon payment. It’s simply unsustainable and irresponsible for us to ignore it. The responsible solution, for our generation and the next, is to create a responsible and disciplined flat payment plan.

…..
This agreement has raised questions about benefit design. For example, should overtime be included in pension calculations – and should employees contribute more to the pension plan? These are fair questions, but I strongly caution against rejecting this agreement on the basis that it doesn’t address benefit design. 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 oppose this agreement when a separate conversation can be had about benefit design?

And let’s be honest: Rejecting this agreement would also fail to address benefit design – while also eliminating any chance for pension payment reform. Rejecting this agreement would be the worst case scenario.

The credit rating agencies endorse this action (Moody’s called it a “credit positive”). The business community has supported this agreement and demanded action. I urge support for this agreement to steer the state from financial devastation, and to establish predictability that businesses and residents deserve.

I agree that flat dollar is better than level percentage (Explanation here), but this damn well is kicking the can. It’s definitely better than not making these payments – but pretending that they were ever going to make those balloon payments was absurd to begin with.

If they did level dollar over a shorter period (like the 14 years), that would have been better. If you’re amortizing over 30 years, many of the people who are being owed that unfunded liability (i.e. pensioners) will have been dead by the time you pay this all off. That is not particularly safe.

They keep jawboning about financial devastation, but it was always a lie that they were ever going to make those payments. Pretending that was a real option is just political marketing. Feh.

Let’s switch to the Pew Trusts testimony. First, here’s a projection of the proposed deal versus what already existed. So comparing something real (the new deal) against something that never was going to happen.

I will snip out one graph:

Notes: we don’t see the historical contributions… isn’t that interesting?

The contribution schedule for the next few years is pretty much the same as the old way. It even exceeds the prior schedule for a few years, before the old way starts to exceed.

The result (assuming projection):

So the unfunded liability goes down more slowly — and it starts higher because not they’re using 6.9% instead of 8%. Just like when you refinance a loan to a lower interest rate and longer period.

Let’s go to Greg Mennis of Pew’s written testimony – an excerpt:

Perhaps more importantly, the new policy is projected to increase funding into the state pension system in the near term. An increase of more than half a billion dollars compared to current policy over the next five years, and more than a billion dollars over 10 years – a substantial level of payment against the current $16.5 billion in pension debt. We evaluate funding policy impacts over five to 10 years to ensure that payments are not back loaded, which can compound costs. And in Connecticut, the five year time horizon is also meaningful in that we expect the funding policy to be reviewed in that time frame under current law.

EXACTLY.

Come five years from now, after the payments are essentially the same, and no changes have been made to the pension benefit design, they will all of a sudden realize that the payments are too high. So they’re “refinance” again.

Back to Pew:

The primary concern that has been voiced on the agreement is around the potential cost of extending the amortization schedule –the time horizon for the payment plan that actuaries project will be required to achieve fully funded status. However, our analysis indicates that if policymakers agree that lowering the assumed rate of return to 6.9% is prudent, legislators face a choice: to either increase annual contributions to SERS by approximately $300 million each year beginning with next year’s budget, or extend the payment plan to recognize the impact of the lower assumed rate of return on plan investments. Note also that both Moody’s and Standard & Poor’s have identified similar concerns but also issued net positive reviews of the proposed funding policy.

There are reasons to be skeptical of this deal. Let’s focus on that 5-year horizon where we expect they’ll come back and renegotiate this again.

BUYING TIME FOR NO CHANGE

You see the large arc of the unfunded liability getting paid down.

Let’s concentrate on the five years, shall we?

Here are the payments:

Here is just the unfunded liability trajectory for those years:

Seems to me that the unfunded liability doesn’t really come down til 2021, eh?

And that’s assuming all the assumptions are fulfilled… or balance out. And we’ve seen where assumptions are all biased one way, eh?

So what happens five years from now if they find the unfunded liability larger than originally projected?

Why do I get the feeling they will do the exact same thing again?

A compilation of my Connecticut posts