GOV. MALLOY UNVEILS PENSION PROPOSAL THAT WILL SAVE TAXPAYERS NEARLY $6 BILLION OVER TWENTY YEARS
Will Speed Up Pension Funding, Reaching 80% By 2025
(HARTFORD, CT) – Governor Dannel P. Malloy today announced a change to the pension funding plan that will avoid a spike in the state’s obligation in Fiscal Year (FY) 2032, avoiding a potential fiscal crisis. Under the current contribution plan, the state would have to make a one-time payment of $4.5 billion in FY2032 in order to reach full funding. The restructuring will save the state nearly $6 billion over the next 20 years, and put the pension system on the road to long-term sustainability, something that is currently not the case.
“I made it clear from the day I took office that I am committed to ending years of bad financial practices and getting the state’s fiscal house in order,” said Governor Malloy. “We have made enormous progress on that front, and in doing so we've begun to stabilize the state’s finances. That's one reason we saw a net gain in jobs last year for the first time in four years, and why unemployment is at its lowest point in more than two years and heading down. But there is more to be done on this front.”
“For more than 20 years, the state relied on a series of gimmicks to hide the fact that our finances were a mess,” Governor Malloy continued. “These tricks set us on a path that will require the state to contribute more than $4 billion in one fiscal year – four times our current payment – to fully fund the system if we stayed with the current plan. It was a pie in the sky approach to future planning that has a real affect on the way we do business today, specifically on our current bond rating.”
The key to managing the state long-term liabilities is to reverse the history of chronic underfunding of the state’s pension system. In addition to the larger payments in the future, deferring our obligations causes the state to lose the opportunity to invest pension funds and enjoy the long-term investment earnings. Connecticut’s State Employee Retirement System (SERS) is funded today at less than 48%. The former strategy projected funding at 100% in 2032, but defers so much of the contributions that the payment in the final year would have to be about $4 billion.
A payment of that magnitude would either decimate funding for schools and other critically important programs or force the state to raise taxes.
Governor Malloy added, “Let’s put what we’re doing another way – too many people wait until they are older to start saving for their retirement, and as a result they have to make large payments at the end in order to make it work. What we’re announcing today is basically like starting a 401k when you’re young, and getting some of the work done earlier. ”
Today, Governor Malloy is proposing to avoid this mess by taking the following steps:
Eliminate SEBAC 4 and 5 provisions related to pension funding. These agreements were entered into by Governor Rowland in 1995 and 1997 in order to reduce pension contributions and pushed our payments out well into the future. Eliminating the provisions will increase our annually required contribution by about $125 million in the coming year, and a similar amount in coming years.
Starting in FY2014, appropriate additional funds, over and above the Annually Required Contribution, in order to achieve 80% funding in FY 2025, and reaching 100% in 2032 without ever making a payment over $2.05 billion.
Amend the spending cap to exclude pension contributions in excess of the Annually Required Contribution. We should not put limits on our ability to be responsible with the public’s money.
The result of this will be aggregate savings of $5.8 billion between now and 2032, according to the State’s actuary.
“For many years as state Comptroller, I criticized the practice of delaying contributions to the pension fund in order to balance the budget as a gimmick that was only digging a deeper hole in our fiscal future,” said Lieutenant Governor Nancy Wyman. “It is unfortunate that it has taken this long for state government to address this issue in a meaningful fashion. But I am very pleased that our administration is going to be the one that finally starts to deal with this very real threat to our fiscal stability, and to our taxpayers.”
“Last year, we took on an historic deficit, adopted generally accepted accounting principles, made more than $1.5 billion in tough spending cuts, brought in new revenue and negotiated more than $20 billion in savings from our public employees,” continued Governor Malloy. “This year, we’re keeping those principles in place and getting our house in order for the long-term. And we’re going to do it with a balanced budget.”
For Immediate Release: January 23, 2012
Contact: Andrew Doba