STUMP » Articles » Pensions Catch-Up Week: Connecticut Trying to Fix a Hole » 15 March 2017, 01:28

A really large hole.

So I looked in on the CT budget about a month ago.

Let’s see what’s up!

CONNECTICUT TOWNS UNHAPPY

Small towns want teachers’ pension bills ‘off the table’

Connecticut’s small towns pressed the General Assembly on Thursday to take the governor’s proposal to shift a third of teacher pension costs onto communities “off the table” in state budget deliberations – but administration officials held firm on their plan.

And while some legislators already have said — privately or publicly — that the controversial plan effectively is dead, the Connecticut Council of Small Towns said the looming threat alone has paralyzed local budget preparations.

COST also raised a new legal argument that could force Gov. Dannel P. Malloy to choose between his public description of the pension billing plan, and his legal definition.

In other words, either stop describing it as a “spending cut” and admit it is a new $400 million annual fee imposed on cities and towns, or risk a legal battle.

“Lawmakers need to take this issue off the table and give towns some breathing room to develop local budgets that control property taxes,” said Litchfield First Selectman Leo Paul, who is president of COST.

“We’re worried people see this as a potential solution” to state government’s budget woes, said Ridgefield First Selectman Rudy Marconi, who added legislators may not realize it would force huge local property tax hikes.

A growing price tag

Arguably the most problematic line item in the state budget, Connecticut’s annual contribution to the municipal teachers’ pension fund could grow sixfold between now and the early 2030s, according to a 2015 study prepared by the Center for Retirement Research at Boston College.

This and other retirement benefit programs suffer from nearly 70 years of inadequate state funding, and costs are projected to surge dramatically over the next 15 to 20 years.

Increases in these areas are some of the major reasons behind deficit projections of $1.4 billion to $1.7 billion in state finances next fiscal year.

Currently standing at $1 billion in a roughly $18 billion General Fund, the required contribution will grow by $319 million over the next two years alone — a yearly average of 16 percent.

Malloy wants to shift one-third of the teacher pension costs starting next fiscal year onto cities and towns. That would amount to $408 million in 2017-19 and $421 million the year after that.

The cost-shift would have a big impact on local budgets.

If New Haven had been required to pick up one-third of its teacher pension cost last fiscal year, it would have had to pay $11.3 million, according to data provided by the governor’s budget office. Next year, one-third of the cost rings in at $14.9 million. And the costs would continue to rise, given the state is on the hook for $381.4 million in pension costs for retired New Haven teachers. If Malloy’s plan goes forward, $127 million of that liability would be spun off to the city over the next 15 years.

It goes beyond this simple unhappiness, of course.

There are threats to sue the state:

Town threatens legal action against Governor’s teacher pension plan

RIDGEFIELD—Several towns joined Ridgefield Thursday in threatening legal action against the state if Gov. Dannel P. Malloy’s plan to shift teacher pension costs to municipalities is adopted in next year’s budget.

A legal brief commissioned by First Selectman Rudy Marconi concluded that the governor’s proposal, which would require municipalities pay one-third of teacher pensions, likely violates both state statute and bond covenants made by the state. Marconi shared the brief at a press conference held Thursday morning by the Connecticut Council of Small Towns.

“Given the various serious legal questions that this proposal raises, COST is urging lawmakers to take this issue off the table,” Marconi said at the conference.

The plan to shift part of the costs to municipalities was presented in Malloy’s two-year budget proposal last month. Along with other cuts to state funding in the budget, the proposal would mean several towns owe money to the state, $4.4 million in Ridgefield’s case.

Marconi, who is also vice president of COST, said Ridgefield’s Board of Selectmen asked him to research legal options after hearing the proposal. He requested the law firm Cohen and Wolf P.C look in to the matter, and then shared the resulting legal opinion with COST, since officials in other towns had expressed similar concern.

……
Contributions from municipalities are not an allowable source of funding for teacher pensions under state law and using them to address liabilities in the fund would “circumvent” the protocol laid out in the statute, according to the brief.
While these parts of the statute could be amended by the legislature, Gara said, it would be more difficult to override bond covenants, which the law firm found would also be violated by the pension plan.

In 2008 the state issued $2-billion worth of bonds to cover unfunded portions of the reserve. Under covenants made with the bond-issuer, the state can’t reduce its contributions as they pay back the bonds over the next 25 years.
The brief also found that the state treasurer advised in 2015 against changing these contributions.

“State Treasurer Denise Nappier suggested that altering contributions to the TRS fund ‘would be a (legal) problem,’” the law firm wrote.

A 2014 study found that Connecticut’s teacher retirement fund’s liabilities outweighed its assets by about $10 billion. About 80 percent of the $1 billion contributed this year to teacher’s retirement is needed to offset this liability, rather than add to present-day teacher benefits.

Town officials said Thursday that municipalities and taxpayers should not be punished for the state’s mismanagement of the fund.

The state didn’t mismanage the fund re: assets, as far as I can tell. But I’ll look at that another time.

The “mismanagement”, such as it was, was telling the employers they could contribute so little to the plans and everything would be okey-dokey.

It’s still a problem. The proposed payments are still too low.

RICH TOWN GREENWICH SAYS OKAY WE’LL PLAN TO PAY

Greenwich could bump taxes to prep for pension bill

GREENWICH — Finance board members might raise the tax rate in preparation for an initiative put forth by the governor to have towns cover part of teachers’ pension costs.

The Board of Estimate and Taxation’s Budget Committee is considering a town budget for 2017-18 that would raise the mill rate by 1.79 percent, which would be the smallest increase in 20 years. But committee members on Tuesday discussed raising the mill rate by closer to 2 percent to create a reserve that could help cover the town’s share of pension costs.

“This wouldn’t fully fund the threat from Hartford because we don’t know how much that’s actually going to be,” said BET Budget Committee Chairman James Lash. “But it will at least set aside some money. If it turns out nothing comes from Hartford, which I unfortunately think isn’t likely, then next year it would come back as a lower mill rate increase because we can use some of this to offset that unknown cost.”

Gov. Dannel P. Malloy earlier this month proposed major changes in how the state funds education. He recommended shifting a larger share of grant money from suburbs to city school districts, and proposed having municipalities pick up one-third — approximately $400 million — of teacher pension costs. The full cost of teachers’ pensions has traditionally been borne by the state.

Lash said raising the mill rate is one of three options being looked at “to build a little nest egg” to cover Malloy’s proposals, should they move forward. The other two are taking less money out of the fund balance to apply to next year’s budget, which lowers the tax burden on residents, in order to save it for the future, and increasing the appropriation for capital projects.

There’s an extreme rich/poor dichotomy in Connecticut, and it’s stark.

I will just link to this piece on the poorest towns in Connecticut. Hartford, the capital, is one of the worst. There’s very high poverty in the town itself. Most of the downtown workers live in West Hartford (separate from Hartford) or suburbs father out. I live very far away, and drive through both Waterbury and Danbury to get home.

There’s New Haven, home of Yale, with also very high poverty in the town itself.

Anyway, there may be some rich people in some of these towns, but they’re not necessarily enough to fill the hole made by the pensions.

MUSICAL INTERLUDE

CT TEACHERS PENSIONS ARE BOTTOM OF THE BARREL

Don’t take my word for it. NY Times explains:

The State of State Teachers’ Pension Plans
By KARL RUSSELL and MARY WILLIAMS WALSH MARCH 6, 2017

As teachers across the country retire, their pensions are being subsidized by newly hired teachers to a surprising degree. Teachers’ pension plans have always rewarded long-serving veterans at the expense of short-termers. But now, as more and more plans develop shortfalls, states have been imposing cost-cutting measures, and recent research shows that the newest hires are bearing the brunt of the changes, raising questions of fairness.

The Plans Received Low Marks

The Urban Institute has graded America’s state-run pension systems on their performance in a few areas: their financial strength; how well they provide retirement security to short-term or long-term workers; the workplace incentives they offer various age groups; and whether participating branches of government are funding them properly. Grades for all types of public pensions are available on the Urban Institute’s website, where they can be filtered for individual strengths and weaknesses.

…..
No states got an A and only six states received a B: Arkansas, Delaware, Florida, New York, Oregon and Wyoming. Most states — 33 — received a C, while six got a D. The last six — Connecticut, the District of Columbia, Kentucky, Massachusetts, Ohio and Rhode Island — each received an F.

The Urban Institute interactive site is here.

Here is their page for the CT Teachers Plan.

And the grades:

So they’re giving 100% for making “full” contributions. And if you look at the Public Pension Plan database for this plan, that does bear it out — because of several things they did to minimize how the “required” costs were.

That’s the real mismanagement of the fund. Someone thinking they were clever in minimizing pension fund contributions.

And yes, that spike was a pension obligation bond. UGH.

SOMEONE HORNING IN ON MY HOBBY

These people actually live in CT, so the horrid state of CT’s pensions are going to be on their heads more than mine (though yes, I pay CT income taxes. yay.)

State pension problems become Greenwich couple’s unexpected pet project

GREENWICH — For Nancy Cooper and Andy Duus, retired life is as busy as full-time employment.

Duus serves on the Representative Town Meeting; Cooper advises on four corporate boards. Both keep busy with the League of Women Voters, their homeowners’ association, their church and Riverside Yacht Club.

What they didn’t foresee when they left professional life was a future marked by fiscal activism. But an interest in checking out the state’s accounts a few years ago has turned into an unexpected passion.

“I was like, ‘Oh my god, there is a problem here,’” said Cooper. “It was pension and it was debt and no growth.”

Over the past three years, Cooper and Duus have poured over state financial reports. And they have discovered that people want to hear what they have found. The pair has given several public presentations to Greenwich residents to explain their findings. They’ve even won an audience with a top adviser to Governor Dannel P. Malloy to present their recommendations for fixing Connecticut’s problems.

……
The picture they painted was of a state budget on the verge of calamity.
Connecticut has large and accelerating budget deficits. The state comptroller’s office reported that Connecticut’s net deficit — including all unfunded liabilities and assets — totaled negative $50.4 billion at the end of fiscal year 2015-16.

“Government accounting allows a lot of this stuff to be covered up,” said Duus. “That’s the crime here.”

Revenue is not Connecticut’s problem, they said. Connecticut taxpayers bear one of the highest state and local tax burdens per capita in the nation, according to a leading independent tax policy nonprofit.

Instead, Duus and Cooper point to underfunded and snowballing pensions for state employees and teachers as the biggest source of the problem.

Connecticut owed more than $1.5 billion in pension payments in 2016, according to State Comptroller Kevin Lembo. That annual payment could grow from $1.5 billion to nearly $6 billion by 2032.

“It’s death by a thousand cuts,” said Duus. “We never solve the problem, we’re just delaying it. It’s just kicking the can down the road.”

This month the state has begun to tackle the pension issue.

In his recent budget address, Governor Dannel P. Malloy has proposed that municipalities help the state make up for the deficit by picking up one third — approximately $400 million — of the cost of teachers’ pensions starting next year. The unprecedented proposal could leave Greenwich scrambling to find an additional $10 million to send to Hartford next year.

Duus had another idea. He proposed a “buy out” of state employee and teachers’ pensions, something uncommon in the public sector, but very common among corporations.

Essentially, employees would trade in their defined benefit pension plans for defined contribution plans, a matching plan that specifies how much an employer must contribute to an employee’s retirement account, typically a 401(k). If they were to switch, employees would get a lump sum from the state equal to the amount of pension money they had earned so far, which they could place into their new 401(k)s.

The state would still have to borrow billions to give out the retirement money, but the buy-out would stop the pension deficit from growing even bigger, Cooper and Duus said.

Duus met with Malloy advisor Ben Barnes, secretary of the state Office of Policy and Management, in April 2016 to pitch the pension buy-out to him.

Barnes listened to Duus’s proposal but didn’t bite.

“Moving the state to 401k-style plans that are primarily driven by ideology and the financial services industry” would “provide no appreciable savings to the state, zero resolution to the unfunded liability, and create a closed pension system that would expose the state to fund the entirety of market shocks,” said Chris McClure, a spokesman for Barnes. “They should not expect that type of pension reform from this governor.”

Duus left the meeting with Barnes feeling disappointed.

“I really do think what I proposed is the right structure, is the fair structure,” he said.

What did these people do before retirement?

Both boast long resumes in finance: Duus was a Wall Street investment banker for 17 years with Goldman Sachs and Bear Stearns. Cooper worked as a chief financial officer for IBM, Pitney Bowes and CA Technologies since 1977.

Okay. So they’ve never dealt with profligates or politicians before? (but I repeat myself)

The bit that had me laughing is that they thought they’d be able to convince the politicians. Yes, the 401(k) is a bad deal because the 401(k) can’t “guarantee” 8.25% returns and give lifetime income assuming an 8.25% return in perpetuity.

Of course, neither can public pensions, but they can pretend to. For a while.

I don’t have a solution for the state, fwiw. Or any of these states with grossly underfunded pensions. Because the way the politicians and especially the public employees have been treating the problem is as if the money will always appear when they need it.

They were underfunding these pensions for decades. It’s not like they’re going to magically become fiscally sound now, and they’re not going to be willing to pony the amount of money it will take to make the pensions whole. It’s not like the taxpayers, many of whom were not there for the decades of underfunding, are going to be too enamoured of fixing the hole.

So I’m not even trying to concentrate on a solution at this point. Too many “clever ideas”. The pension buyout is not a particularly clever idea, as it requires pensions that aren’t even 50% funded to pony up a bunch of cash they don’t have. Putting a pension obligation bond on top of everything else just creates a new problem.

I am concentrating on making sure people know that they seriously can run out of money in their pension funds, and they are essentially bankrupt right now. Not 20 years in the future. Now.

Once you’re in the asset death spiral, it’s pretty much too late to fix that hole.

You want to be in a pay-as-you-go public pension? Ask Puerto Rico how that’s working out for them.

Compilation of Connecticut posts