Malloy right to focus on pension-fund fix
Gov. Dannel P. Malloy has shown leadership in his quest to heal Connecticut's ailing pension fund, which could drive the state off a fiscal cliff in no short order unless drastic measures are taken to develop a new strategy that pays down billions of dollars in unfunded liabilities.
While previous governors ignored the looming pension crisis for years — and also exacerbated the problem with poor policies that increased the state's unfunded liability — Malloy has been trying to tackle the issue since 2011.
The business community should be thankful Malloy is expending some political capital on this issue. If it's ignored for much longer Connecticut's fiscal crisis will become so acute, massive tax hikes would be unavoidable, sending additional residents and businesses rushing to the exit door.
A recent study by Boston College's Center for Retirement Research found that if the state remains on its current path to funding pensions for state workers and teachers, the annual budget expenditure would increase from around $1.8 billion today to $6 billion by 2032. In a recent interview with the Hartford Business Journal, Ben Barnes, the state budget director, likened that scenario to driving off a fiscal cliff.
“Who's going to want to be in that car?” Barnes asked. That frank assessment reflects the precarious financial position our state is truly in.
Malloy's pension-rectifying efforts started in 2011 and 2012, when the Democratic governor decided, among other changes, to accelerate payments into the pension fund to begin shoring up what is now $25.7 billion in unfunded liabilities owed to state workers and teachers. Unfortunately, pension costs are still growing faster than anticipated, prompting Malloy to hire Boston College to provide a frank assessment of the unfunded liability and some options on how to fix it.
Their suggestions, which have been called “radical” by some key state officials, include splitting off the 31,600 most expensive retirement system members, known as Tier I beneficiaries, and paying their benefits over a longer period of time through an annual appropriation in the state budget. Malloy also wants to lower investment-return expectations, which will require greater annual contributions in the near term, but help avoid a spike in annual payments to approximately $6 billion around 2032.
We are not 100 percent on board with all that Malloy is proposing. Even the governor admits there are still many financial and legal questions that must be answered. For example, Treasurer Denise Nappier believes splitting the pension fund and using a pay-as-you-go method would violate bond covenants from $2 billion in debt the state took on in 2008 to reduce unfunded liabilities in the teachers' fund.
Comptroller Kevin Lembo has raised various other issues with Malloy's plan and has pitched his own ideas, which don't include the pension-plan split. Democrats, Republicans and the business community are also now closely paying attention to the issue.
Regardless of whether all, some or none of Malloy's suggested pension changes are part of the final solution, the governor's efforts have brought the issue to the forefront of taxpayer's minds. It seems as though policymakers on both sides of the aisle finally realize now is the time to rectify the state's unfunded pension liabilities, before they drown the state budget.
The tidal wave is coming.
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