Policy Documents

Research & Commentary: Connecticut Pension Reform

February 5, 2014

According to the most recent available data (2011), Connecticut’s pension system is the second-most underfunded in the United States, trailing only Illinois, which passed minor reforms in late 2013. Connecticut is in need of major pension reform to address the systemic problems in the state’s pension system and close the funding gap.

Mismanagement of the state retirement fund has created an unfunded liability that places a heavy burden on taxpayers. In an article on Connecticut’s pension crisis, The Day newspaper found when averaged together, the two major pension funds were funded at only 49 percent in 2012.

Although the state met its required contribution in 2013, over the past 25 years Connecticut has rarely done so. Connecticut’s retired state employees received the highest annual pensions in the country in 2011, despite pensioners having to contribute less than the national average toward them.

The Day illustrated the scope of the problem by dividing up the pension debt on a per-capita basis, finding it would cost each person in the state $12,157 to close the $44 billion funding gap in the state’s two largest pension systems and its retiree health benefit programs. The Day also cited actuarial estimates showing the state would have to allocate about $70 million in additional funds annually for 18 years to close the gap in just the state employees’ pension system. This does not include the teachers’ retirement system, which has an $11 billion funding gap of its own.

In many instances, the regulators controlling pension funds have overestimated the value of future investments and the rate of return they can expect, which allowed them to reduce yearly government contributions to the fund. Connecticut recently lowered its assumed rate of return on its investments to 8 percent, but if the return continues to fall short of expectations, the state’s pension systems are in even more trouble than is currently understood.

Connecticut taxpayers cannot afford overpromising and underfunding their state’s pension plans. In the short term, pension formulas should be changed, automatic cost of living adjustments (COLAs) curtailed, pension rate of return assumptions changed to more realistic levels, and workers required to make higher contributions.

Ultimately, sustainability will require Connecticut to follow the private sector’s lead and switch workers from defined-benefit pension systems to defined-contribution plans like 401ks. Defined-contribution plans give retirees direct control over their retirement and allow them to change jobs without losing their accrued pension benefits. This also enables governments to budget more accurately, because the benefits are paid directly to the employee and are a set amount of money each year.

The following articles examine state pension reform from multiple perspectives.

Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
http://heartland.org/policy-documents/defined-contribution-vs-defined-benefit-pensions 
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans. 

The Municipal Government Debt Crisis
http://heartland.org/policy-documents/municipal-government-debt-crisis 
This study by The Heartland Institute and Truth in Accounting (TIA) is the comprehensive analysis of Cook County’s taxing districts. “It reveals how officials in many districts have been misrepresenting their financial condition by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt,” the authors write. It finds several taxing districts in Cook County, Illinois face an even worse financial burden than cities currently in the news, such as Stockton, California. 

Research & Commentary: Public Pensions and the Assumed Rate of Return
http://heartland.org/policy-documents/research-commentary-public-pensions-and-assumed-rate-return 
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments. 

The State Public Pension Crisis: A 50-State Report Card
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/27578.pdf 
This Heartland Institute report examines problems currently facing public pension systems, including the enormous burdens public employee pensions pose in some locations. The report ranks each state according to the operation and relative disposition of the pension plans in the 50 states and suggests ways states might go about solving their pension system problems. 

Connecticut’s Public Pension Liabilities: How Big Are They and What Can Be Done About Them
http://heartland.org/policy-documents/connecticuts-public-pension-liabilities-how-big-are-they-and-what-can-be-done-about
The Connecticut Policy Institute provides an accurate accounting of Connecticut’s pension liabilities and articulates the options for reducing them. The paper proposes a means for making the state’s pension obligations for new workers more affordable to prevent a similar crisis from emerging in the future. 

Ignoring It Won’t Make It Go Away: Connecticut’s $51 Billion Unfunded Retiree Liability
http://heartland.org/policy-documents/ignoring-it-wont-make-it-go-away-connecticuts-51-billion-unfunded-retiree-liability
This analysis by the Yankee Institute examines Connecticut’s pension system and concludes its real unfunded liability is larger than most estimates: “Pension liabilities are being dramatically underestimated by the state because of unrealistic assumptions about discount rates and rates of return. This new study finds that the real pension liability is between $50.4 billion and $80.7 billion.” 

‘A Financial Time Bomb’: State Pension System Is One of the Country's Most Underfunded
http://www.theday.com/article/20140112/NWS12/140119903/-1/NWSctpensions
The Day outlines the results of its months-long investigation of Connecticut’s state's union-negotiated employee pensions and the system that administers pension and health benefits for retired public school teachers. The study found the state’s pension system was the second-most underfunded in the United States, in worse shape than every other state’s except Illinois’. 

Legacy of Pension Neglect Tough to Reverse
http://www.theday.com/article/20140112/OP01/301129989
This editorial from The Day discusses Connecticut’s underfunded state employees’ pension system and the steps necessary to repair it. 

Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
http://heartland.org/policy-documents/fixing-public-sector-pension-problem-true-path-long-term-reform
Richard Dreyfuss of the Manhattan Institute examines various states’ pension reform efforts and recommends they borrow a page from the private sector by shifting to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing a complex of risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.” 

State Pension Funds Fall Off a Cliff
http://heartland.org/policy-documents/state-pension-funds-fall-cliff 
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies—the Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS)—are examined in depth to explore fatal flaws that caused funding crises in these plans. 

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
http://heartland.org/policy-documents/gathering-pension-storm
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans, offering solutions and explaining why the current system is a disaster in the making.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.