Pension Debt Among Worst In Nation

Connecticut is among the worst in the nation for not setting aside money to pay for its pension obligations, estimated to be on the hook for more than $35 billion for state employees over the next 30 years.

The Pew Center On The States, a nonprofit that evaluates government performance, is reporting that Connecticut is the second-worst state in the nation with just 56 percent of the state’s pension obligation set aside.

The news was worse for other post-employment benefits (OPEB) costs — mostly health care costs for retirees. Connecticut was one of 36 states that had not set aside any money for retirement benefit costs.

According to the Connecticut Economic Quarterly spring report, the state’s unfunded pension obligations add up to a potentially debilitating financial situation, and were equal to a year’s worth of state spending in 2006. The situation, the report warns, will worsen if the state continues on its present course.

Arthur Wright, a retired University of Connecticut economics professor and author of the report’s article on the state’s unfunded public retiree benefits, said the “arithmetic is compelling.”

Impending Crisis

It would take $1 billion a year to fund state pensions and $1.6 billion to fund state OPEB costs, he wrote in the report, concluding that’s a total of $2.6 billion, or roughly 15 percent of the state’s current budget.

Wright maintains that the state’s unfunded pension liability is a growing concern because of its impact on tax increases and the state’s bond rating. In evaluating public borrowings, big unfunded liabilities are clearly a negative and will affect the state’s borrowing position, he explained.

“It’s going to be passed down to other levels of government,” Wright said. “It’s something to pay attention to when legislators are throwing around a lot of tax breaks and bail outs. They should be concerned with what this is doing long term.”

Though steps have been taken to address shortcomings in pension funding — specifically the authorization of $2 billion in pension obligation bonds to fund the teachers’ pension along with a new law requiring the state to fund its obligation each year going forward — the liability for OPEB remains largely unaddressed.

It’s a concern for state Comptroller Nancy Wyman, who views the situation as an impending crisis.

She maintains that every man, woman and child in the state would need to send in a check of $6,186 to erase the state’s liability.

Her solution is to appropriate $100 million from the state’s surplus towards the retirees’ health insurance fund, or OPEB, and for the state to commit to using a percentage of future surpluses towards the state’s obligation. Initially proposed in 2007, Wyman points out that if her recommendation had been enacted a year earlier, the state would have already lowered its liability by $5 billion.

“These are significant state savings as we enter difficult budget years,” Wyman said. “Implementing this common-sense solution will reduce pressure on the state’s bond rating and significantly lessen the need for tax increases to fund this liability moving forward.”

Wyman believes a long-term solution is necessary, not the legislature’s one-time $10 million contribution. “I do not believe that this funding level sufficiently reduces the state’s unfunded liability,” Wyman said in a letter to Gov. M. Jodi Rell on Dec. 31.

“Connecticut carries the largest liability in the country, placing it at a comparative disadvantage with respect to the other states’ bond ratings,” she added.

Task Force Proposed

The governor has proposed the creation of a task force that would study and make recommendations for a long-term solution to the problem.

The immediate goal for the entire surplus, from Rell’s point of view, is to fill up the state’s reserve fund, commonly referred to as the “rainy day fund,” said Jeffrey Beckham, undersecretary for legislative affairs with the state Office of Policy Management.

“The maximum limit [of the rainy day fund] is 10 percent of the budget, and we’re not quite there yet,” Beckham said. “The goal is to fill that fund to protect current services.”

Beckham said the plan to divert from the surplus for the unfunded liability is risky. “It’s getting a little choppier with the economy, and we have to see how that plays out,” he said.

Rising Health Care Costs

Current liability costs are exacerbated by health insurance costs for retirees, which are expected to skyrocket.

For example, California’s retiree health care costs will jump from $4 billion in 2006 to $10 billion in 2012 to $27 billion in 2019, according to the Pew Center.

With a rise in baby boomer retirements and health care costs, combined with retirees living longer, Wright of UConn warns that the situation will lead to a perfect storm of unfunded liabilities.