CT reports progress on underfunded state employee pension funds

Gov. Ned Lamont and the state’s two elected fiscal officers, the treasurer and comptroller, reported Monday that Connecticut’s once-neglected state-employee pension system is now 55% funded — up from 38% eight years ago, but still a national laggard.

Additional contributions and better investment returns produced gains of $2.7 billion in the state employees retirement system and a similar gain in the separate teachers’ system, which is now 62.3% funded. But the officials warned the state needs to continue the progress.

“It means we’ve gone from being the third-worst-funded pension in the country to the sixth-worst,” Lamont said. “We have a long way to go, and the rest of the country is watching.”

Connecticut is one of six states with a state employees pension fund less than 60% funded, a consequence of decades of neglect: No state contributions were made to the fund from its creation in 1939 to 1971, then inadequate support until Gov. Dannel P. Malloy took office in 2011.

Lamont, Treasurer Erick Russell and Comptroller Sean Scanlon, all Democrats, said the latest pension fund valuations demonstrate that various reforms begun during the Malloy administration and accelerated by Lamont are paying off, but true stability is years away. 

“It takes a long time to dig out of this hole,” Russell said.

For the past 13 years, the state has met the basic standard of making actuarially determined contributions. More recently, it also has seen far better returns on the investment of pension funds, and it’s used six straight years of budget surpluses to reduce the unfunded liability.

“I think we have made incredible progress as a state,” Scanlon said.

“I think we’ve shown we can manage our house,” Lamont said. 

The celebration by Lamont, Russell and Scanlon comes a month before the General Assembly is scheduled to open its annual session and begin a debate on whether the state can afford to loosen the spending controls collectively known as the “fiscal guardrails.”

A volatility cap and other restrictions imposed in 2017 and unanimously renewed last year have required setting aside $4 billion as a budget reserve and using another $8.5 billion in surplus funds to reduce the unfunded pension liability, frustrating advocates who see mounting unmet needs in a time of relative plenty. 

Paying down the unfunded liability has immediate and longterm benefits: Without the added investment over the last few years, the required pension contributions in the next fiscal year would have been about $737 million higher, and the projected savings to taxpayers over the next 25 years are about $18 billion, Scanlon said.

Leaders of the Democratic majorities in the General Assembly, as well as a wide range of advocacy groups, are expected to urge Lamont to recalibrate the volatility cap to allow some surplus funds to be spent. On Monday, Lamont offered them little encouragement.

Lamont pronounced himself “strict” on the question of maintaining the guardrails, while repeatedly refusing to say if he already has decided to propose a budget that will maintain the caps as currently written. Lamont will make a “State of the State” address on Jan. 8 then make his budget proposal a month later.

His only promise was to propose “an honestly balanced budget.”

“We haven’t done that for 30 years in the state, until the last six or seven years. I don’t want a lot of assumptions that just create a hole in the out years. I want to make sure that we have a balanced budget for our kids going forward as well,” Lamont said. “I’m a little surprised — sometimes people say we’ll spend a lot more now and we’ll figure out how to pay for it later. I think that’s the type of credit card mentality that got the state with big problems over the last 30 years. I’m not gonna let it happen again.”

Democrats won majorities of 25-11 in the Senate and 102-49 in the House last month, each veto-proof margins. But there are moderate Democrats who could join minority Republicans in upholding any Lamont veto of changes to the guardrails. Senate Republicans immediately issued a statement urging Lamont to be resolute.

Connecticut for All, a coalition of 60 community, faith, labor and nonprofit groups, said Lamont and the lawmakers have to balance fiscal responsibility against social needs.

“The last several budget cycles have been irresponsibly unbalanced, leaving working families unnecessarily burdened and blocking needed investments in our communities’ futures,” said Norma Martinez-HoSang, the group’s director. “You don’t make extra car payments when your vehicle is missing an engine. It’s time to get Connecticut back on the road with fiscal policies that are responsive to our current financial state and the needs of our state.”

Management of the pension is somewhat separate from the question of adjusting the guardrails. While the requirements of the volatility cap have accelerated paying down the unfunded liability, the pension funds’ fiscal stability has benefitted from other unrelated reforms that Russell and Scanlon say must be preserved.

They included the basic one of making the annual actuarially required contributions, as well as eschewing a gimmick that lawmakers once used to artificially lower those  required contributions — assuming an artificially high rate of return on investments.

“We have to make sure we protect this culture and never allow ourselves to return to habits of ignoring our obligations,” Russell said.

The state once assumed a rate of return of 8.5%, far beyond the actual returns. In 2019, it lowered the assumed returns to 6.9%. The lower the assumed returns, the higher the annual required contribution to make up the difference.

Over the past two years, changes in investment strategies have yielded better returns.

“We’ve gone from being one of the worst performing pension funds over the last 30 years to being in the top quartile, and that makes an enormous difference,” Lamont said.