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Funding Ratio Falls for State Employee Pensions

by Christine Stuart | Dec 3, 2014 5:30am Google

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Posted to: Pension, State Budget, Taxes

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CLICK TO ENLARGE— Actuarial report on State Employees’ Retirement System pension valuation

 

An actuary hired by the state recently estimated that pension obligations for active and retired state employees totaled $51 billion in 2014, and the funded ratio over the past two years has declined slightly.

The most recent actuarial valuation of the pension funds showed that as of June 30, 2012, the State Employees’ Retirement System was funded at 42.3 percent. But by 2014 it was funded at 41.5 percent. That means the State Employees’ Retirement System has about $10.5 billion worth of assets, which is enough to cover 41.5 percent of the $21 billion in liabilities. Experts say an 80 percent funding level is considered healthy.

“The decline in the funded ratio of the plan confirms my longstanding position that the cost of any change to pension benefits must be fully analyzed before they are implemented,” state Treasurer Denise Nappier said last week. “It bears noting that almost 80 percent of the decline in the funded ratio was attributable to non-market losses — such as increased liabilities for new members and earlier-than-anticipated retirements.”

Nappier said the decline in the funded ratio is also related to the Great Recession.

“The good news is that for the past 4 out of 5 years, we achieved double-digit positive investment returns, which average out to 11.9 percent,” Nappier said. “That said, more needs to be done by the many stakeholders of the SERS — including the governor, the legislature and unions — to get a handle on the real costs of negotiated benefits, and to develop a strategy to reduce the state’s long-term pension liabilities.”

Gov. Dannel P. Malloy said last week that the valuation was not “an apples-to-apples comparison” because the state lowered the anticipated rate of return to the pension fund.

“We are making progress and we will make rapid progress from this point on with respect to the funding of that particular pension,” Malloy said.

An actuary looks at the assets and liabilities for the various state pension funds every two years.

Daniel Livingston, the chief negotiator for the State Employees Bargaining Agent Coalition, said the new report showing a decline in the funded ratio can’t be taken out of context.

He said the new report shows that the old pension plan, which was closed to new employees in 1984, was underfunded and that all current plans are well funded, “but that old debt does need to be paid.”

Livingston attributed the small decline in the funded ratio to two factors.

“First, under the repayment schedule insisted upon in 1997 by then Governor Rowland — called level percent of payroll — funded ratios decrease in the first 15 years of the repayment schedule, and then begin to increase dramatically until the debt is paid off in 30 years. This is because the payments are made as a percent of payroll and thus start very small and increase with inflation,” he said. “Second, the funded ratio reflects the 5-year averaging of the stock market crash of 2008. As the 5 years following 2008 begin to drop off the books, the ratio is predicted to increase.”

The good news, according to Livingston, is that for the first time since 1995 the state had been making the recommended actuarial payments with plans to eliminate the old debt within the next 15 years.

But the Sen. Kevin Witkos, R-Canton, said the new report highlights the “fact that the governor missed significant, needed reforms in his negotiation of SEBAC 2011, such as increasing employee contributions to their rich, defined benefit plans which are currently only at 2 percent of their salary.”

Witkos said the state should also be pursuing reforms to exclude overtime payments from the calculation of retirement benefits and looking at defined contribution plans.

Livingston argued that Republican lawmakers are the ones who blocked Malloy’s attempt to make additional payments toward old pension debt by refusing to change the spending cap.

Livingston said Malloy pitched a plan to allow any surplus to pay down the old pension debt and allow those funds to be excluded from the spending cap. At the moment pension debt payments are counted toward the spending cap.

Unless the state makes these changes, it “is discouraged from making additional payments to retire the pension debt, even though paying off debt is one of the very reasons we have the spending cap,” Livingston added.

But Rep. Vincent Candelora, R-North Branford, called Livingston’s statement “disingenuous.”

“Republicans have continually advocated to better fund our pensions especially when times are tough,” Candelora said Monday.

He said his party has pitched a plan to start using the capital gains taxes — a volatile revenue stream — to help pay off the pension liabilities, rather than using it to increase the operating budget.

Regardless, Candelora said finger pointing isn’t going to solve the problem.

“I think the methods we’ve taken in the past are not bearing fruit and we need to get serious about funding these pensions,” he added.

The Teachers’ Retirement Fund valuation, which was released Oct. 31, did slightly better than the state employees fund because in 2008 the General Assembly agreed to put $2 billion on the state credit card to help make payments to the fund. The teachers’ fund was 59 percent funded and its assets increased $1.6 million and $1.8 million over the two years covered by the report. The unfunded portion of the fund decreased $325 million and other post-employment benefit liabilities, like health care, decreased from $3 billion to $2.4 billion.

“This level of growth is due to Governor Malloy’s ongoing commitment to fully fund our pension commitments as well as the solid investments made by Treasurer Denise Nappier,” Office of Policy and Management Secretary Benjamin Barnes said. “There is more work to be done, but this report shows that promises are being kept and Connecticut is heading in the right direction.”

Tags: pension funded, unfunded pension liability, Denise Nappier, Dannel P. Malloy, returns, investments, Vincent Candelora, Kevin Witkos, Ben Barnes, Daniel Livingston, SERS, dh