When Connecticut deposits about $4.1 billion into its pension funds this fall, it will be the third straight year the state has used its budget surplus to reduce the massive pension debt it has accumulated over more than seven decades.
But a recent analysis by The Pew Charitable Trusts provided a sobering reminder of how far Connecticut still has to go — even given its vast wealth — to overcome decades of fiscal irresponsibility.
Connecticut had reported more than $41 billion in combined debt among its pensions for state employees and for teachers following fiscal 2019. According to Pew, that was 14.8% of Connecticut’s personal income at the time, more than double the national average of 6.8%.
Connecticut was one of 10 states to top the 10% mark and ranked eighth overall. New Jersey finished at the bottom of the scale with a pension debt equal to 20.2% of the state’s personal income.
South Dakota and Wisconsin were the only states in which pension assets slightly exceeded obligations.
“Although states have decades to repay these sums, such spending commitments can have fiscal consequences both now and later,” Pew analysts Joanna Biernacka-Liievestro and Joe Fleming wrote in their report.
They also noted that “most states continue to face higher demands on their future income from unfunded pension obligations” than from other types of debt, such as bond debt or insufficient funding. savings for retirement health care benefits.
Connecticut racked up its pension debt over more than seven decades, from 1939 to 2010. And while the state has fully funded its pension obligations since then, it has also refinanced the state employee retirement system to twice and the teacher system once between 2017 and 2019. This involved reducing required payments, in the late 2010s and early 2020s, and transferring billions of dollars of debt, plus interest, to the taxpayers in the late 2030s and into the 2040s.
Since those refinances, however, the state has used a strong stock market, rising tax revenues, and a new savings program to amass about $5.8 billion in budget surpluses, which it has spent on its pensions. in addition to its regular annual dues.
In addition to the $4.1 billion surplus in the fiscal year ended June 30, Connecticut also saved $1.6 billion in 2020-21 and about $66 million in 2019-20.
Gov. Ned Lamont, who inherited the pension challenge when he took office in January 2019, said last month that pension analysts believe the extra payments will give Connecticut significant fiscal flexibility in the near future.
Putting an additional $5.8 billion into the pension fund should help reduce required annual contributions to retirement programs by about $440 million a year.
But there are other forces trying to push the required contributions in the other direction.
The Dow Jones Industrial Average closed Thursday down more than 11% for the year to date, and the S&P 500 ended down 15% for the same period.
As financial markets slip and the value of Connecticut pension fund investments decline, the required annual contributions to the system traditionally increase over time.
Additionally, more than 4,500 state employees retired between January and June, about double the normal number of retirements the state government sees in any given year.
And while Lamont said this “silver tsunami” – driven by new limits on pension benefits starting July 1 – was not as bad as expected, any increase in pension benefits historically puts pressure. finance on a pension system. In fact, each time a worker retires, he stops contributing to the fund and begins to draw benefits from it.
Lamont’s budget office downplayed Pew’s analysis, calling it “an outdated statement of our retirement issues.”
Chris Collibee, spokesperson for the Office of Policy and Management, added that these additional retirement payments “bring stability and predictability to our budgeting and honor our retirement commitments to retired teachers and state employees.” .
But the extra payments, while unprecedented, still represent less than one-sixth of Connecticut’s long-term pension debt.
And the administration refrained from predicting that those payments alone would put Connecticut’s pension debt on par with the average state, even when measuring pension debt against each state’s wealth.
“Pension actuaries will release their pension fund valuations later this calendar year,” Collibee added. “While many factors influence payments required by the state, the additional $5.8 billion in pension fund deposits will bring us closer to the national average for unfunded liabilities as a share of income. personnel, and will contribute significantly to meeting our unfunded liabilities moving forward.