Lembo: Extra pension payments mean big savings now — and down the road

Back • Publication Date: July 15, 2021 • Fiscal & Economics

While Connecticut wiped out $1.25 billion of its massive, long-term pension debt this month, it still has decades to go to cover the remainder — nearly $40 billion.

But the one benefit will be felt right away. The supplemental payment frees up $110 million Connecticut now can spend annually on something other than its oppressive pension obligations, according to a new analysis.

“This is real relief that will both spare future generations from a legacy of pension debt and give short-term budget relief to taxpayers,” said Comptroller Kevin P. Lembo, citing new projections for the state employees’ pension system from Cavanaugh Macdonald Consulting of Kennesaw, Ga., the fund’s actuaries.

Lembo pressed legislators for several years starting in 2015 to increase savings toward the huge debts Connecticut amassed over more than 70 years in its separate pension systems for state employees and for municipal teachers.

The legislature, led by Sen. John Fonfara, D-Hartford, responded in 2017 by creating the “volatility adjustment,” which prohibits the state from spending a portion of its income tax receipts tied to capital gains and other investment earnings — a source that often fluctuates greatly from year to year.

The stock markets generally have performed well since 2018, resulting in a big savings.

Since then, Connecticut has amassed a rainy day fund that has reached its legal maximum at 15% of annual General Fund spending, or just over $3 billion.

Any surplus beyond that level must, according to the system adopted in 2017, be deposited into either the two major pension funds.

Connecticut entered the 2020-21 fiscal year — which wrapped on June 30 — with almost $41 billion in total pension debt.

The just-completed budget year included more than $2.6 billion in required payments into the two pensions. Many of those dollars, however, will go into benefits for retirees, rather than reducing the debt.

But when it comes to the $1.25 billion left over from the just-ended fiscal year — most of that surplus stems from the volatility adjustment — it will all go toward reducing pension debt.

New projections from Cavanaugh Macdonald project this $1.25 billion — which state Treasurer Shawn Wooden deposited into the state employees’ pension fund — will add $2.75 billion in value to that system over the next 25 years. [The pensions’ assets are invested in stocks, bonds and other securities and add value that way.]

That translates into $110 million in added value per year, according to the analysis.

“It was a big, difficult change, but now we’re seeing the reward of coming together to do hard things,” Lembo said. “There’s a lesson to be learned from that.”

“It now remains our job as state leaders to stay the course and pave the way towards a sustainable economic recovery that reaches everyone across our state, especially those who continue to hurt as we recover from the effects of the pandemic,” Wooden said.

State officials and private policy groups long have noted the annual payments on those obligations gradually have consumed resources previously earmarked for education, health care, municipal aid, transportation and other priorities.

About 40% of the state’s budget in 1992 — the first fiscal year after the state income tax was enacted — was dedicated to education, health care and other programs that affect children, according to Connecticut Voices for Children, a New Haven-based public policy and research group. Now the ratio now is closer to 30%.

Sen. Cathy Osten, D-Sprague, who co-chairs the Appropriations Committee, said recently that legislators hope to be able to shift more than $110 million per year in future budgets away from pension debt and into other programs.

For example, if the new $46.4 billion budget that Gov. Ned Lamont and the General Assembly enacted for the next two fiscal years runs as projected by nonpartisan analysts, Connecticut could be poised to make another $2.3 billion in supplemental pension fund payments by mid-2023.

The impact of those potential contributions hasn’t been calculated yet. But Osten has estimated this could create another $100 million to $200 million in annual savings on pension contributions — depending on how the stock markets fare over the next two years.

Authors: Keith M. Phaneuf •  Source: Connecticut Mirror • View