Gov. Malloy: Independent Analysis Shows Recent Adjustments Are Providing a More Stabilized Path for State Employee Pension System
Governor Says Changes Should be Used as a Model for Teachers’ Pension System
(HARTFORD, CT) – Governor Dannel P. Malloy today announced that a pension stress test recently conducted by The Pew Charitable Trust on behalf of the State of Connecticut shows that recent changes made during the Malloy administration to the State Employees Retirement System (SERS) have helped insulate the system from risk even in poor economic conditions. The Governor said that the changes made to SERS can be used to provide a path to help stabilize the Teachers Retirement System (TRS), which was found by the analysis to be in need of action to aid solvency risks and prevent the forthcoming spikes in the state’s share from overcrowding the state’s budget.
“This analysis demonstrates that actions we took to restructure and reform the State Employees Retirement System have been incredibly effective and provide the path for what we need to do with the Teachers Retirement System to greatly improve the state’s financial future,” Governor Malloy said. “Our pension problems have haunted our state and impeded growth for decades, but by fully funding our obligations, reforming the amortization methods to stabilize annual payments, mitigating additional growth in the unfunded share, and creating a hybrid system for Tier IV employees, we have solidified our state employees’ system – even when faced with a recession. It is now incumbent on the next administration and General Assembly to use this stress test and available data and resources to put the teachers’ system on a sustainable and solvent course.”
The stabilization of SERS is largely due to changes that were implemented in the State Employees Bargaining Agent Coalition (SEBAC) agreement of 2011, the elimination of the SEBAC 4 and 5 contribution adjustments in 2014, SEBAC 2017, and the SERS restructuring changes of December 2016. These agreements have not only reduced the cost of pension benefits for the state going forward, but they also ensure the pension funding method is actuarially sound and does not put state taxpayers at risk of fiscal catastrophe.
Lowering the assumed rate of return and structural changes to the amortization assumptions and methods created a smoother and more predictable payment schedule for the state’s annual contribution. These changes helped avoid the spiking annual contributions the state faced in the late 2020s and early 2030s that could have eclipsed $5 billion per year and would have required significant tax increases or major expenditure cuts. Further, the new system allows for market shocks to be more easily absorbed, as those are amortized over 25-year periods rather than requiring that they be addressed all at once at the end of a fixed period. The state now projects a far more stable and predictable future with a peak contribution of $2.2 billion.
The Malloy administration attempted to address the TRS problems in 2017 by recommending the state restructure the amortization methodology in concurrence with the SERS changes. This would have made the TRS payments more affordable into the future, helped stabilize the system from market shocks, and adopt best practices in the industry. Ultimately, those efforts were not passed by the General Assembly.
The pension stress test analysis was required as part of the state budget bill that was adopted in 2017 (Public Act 17-2). It was undertaken by Pew Charitable Trust at no cost to the state.
The analysis was intended to help policymakers: “(1) plan for the possibility of an extended period of lower investment returns and higher budget costs; (2) prepare for the impact of the next recession on pension system solvency and government budgets; (3) assess whether current policies are sufficient to effectively manage financial market volatility throughout the business cycle; (4) estimate the impact of investment risk on the range of potential costs for current benefits and liabilities; and (5) provide budget officials and legislators with a tool to assess the impact of proposed and enacted policy changes.”
**Download: Pew Charitable Trust Proposed Legislative Stress Test Report for Connecticut Public Pensions
**Download: Pew Charitable Trust Stress Test Analysis Tailored to Connecticut’s Retirement System