Ct Pension Debt May Be Even Worse Than Projected

Riots by government employees in Greece are far away from us, but make no mistake: Connecticut, and many other states, face similar financial crises soon as we have to make good on all the pension and health benefits our elected officials promised to government employees.

For politicians the tactic was a slam dunk. They knew that government workers would turn out to vote, so by promising generous pension and retirement health benefits that didn’t have to be paid for years, they could get elected and get re-elected.

Some politicians, including Gov. M. Jodi Rell and state Treasurer Denise L. Nappier, have been warning us about the problem for years, with little success. But it’s time to wake up folks, because things may be even worse than what they have told us.

The reason is that the gloomy figures they are looking at are based on the BEST scenario of how well the investments that have been socked away will perform in the future to pay for these debts – where our total shortfall exceeds $30 billion.

In the last month some financial experts have been casting serious doubts about the projections Connecticut and other states have been making about the returns that can be expected on our assets invested in stocks, bonds and real estate. They are saying that states are starting to take riskier bets with their investments to try to get the higher returns. Of course, by its very nature, the more the risk the higher the probability of losing money.

And not meeting those projections would add billions to our debt, even double its size.

It is because of that problem, the experts say, that government officials don’t want to face the reality that market conditions have changed as the result of the Great Recession and the trillions of dollars in additional debt that the federal government has taken on to bail us out.

To simplify the issue we can look at a typical middle-class person planning for retirement. If she wanted her yearly retirement income to be $40,000, the amount of assets she would need to produce that amount of money would depend on how much she thought her nest egg would grow each year. That way she could plan on how much she needed to save each year to get to her magic number at retirement.

If she projected that in the next 20 years – with spikes up and down – she would average annual returns of five percent – a fairly reasonable assumption today considering certificates of deposits may get up to 3 percent – she would need to have $795,000 when she retired.

But, say she thought she was a brilliant investor and could goose her returns to average 8.25 percent. She would only need to have saved $475,000 to be able to spend the $40,000. That is quite a difference.

Well, the state of Connecticut, like most states, has used the much higher rate of return to calculate how much money will be needed to pay those debts – figures that John E. Peterson, professor of public policy and finance at the George Mason School of Public Policy, referred to as “Fairy Tale Pension Projections” in his March article for Governing magazine.

While those projections may have made sense in the last 25 years, Peterson and other financial experts doubt that today they are based in reality.

John Garrett, an actuary with Cavanough Macdonald Consulting of Kennesaw, Ga., is Connecticut’s new pension consultant and is working on developing a new analysis, including what should be the proper projected all-important rate of return.

In a telephone interview Thursday, Garrett said he didn’t know what his firm will come up with, but said Connecticut’s 8.25 percent projection was not unreasonable considering that in the past 25 years the average annual rate for state pension funds was higher. He also noted that Connecticut last year reduced its projection for state employee pensions from 8.5 to 8.25.

Both Gov. Rell and Michael J. Cicchetti, deputy commissioner of the state Office of Policy and Management, are less sanguine about the problem.

“This is a financial Sword of Damocles hanging over the state’s head that we literally can no longer afford to ignore. This mounting debt has been virtually ignored for decades. Ignorance may be bliss, but that bliss carries a price – too high a price,” outgoing Governor M. Jodi Rell said Wednesday in a response to questions I asked her staff about the projected rate of return and the growing pension and health debt.

“For that reason, I have established a working group, with representatives from the Treasurer’s and Comptroller’s Offices, my budget office, the state employees union, accountants, actuaries and others to propose short and long term plans for addressing our unfunded liabilities. Their first report is due by July 1,” she said.

Cicchetti, the man who heads that working group, said Thursday he doesn’t feel comfortable with the present projections, especially after reading Professor Petersen’s article and a recent New York Times piece that predicted that states will have to make much riskier investments to try to meet their unreasonable projections. The New York Times article points out that experts are questioning projected rates of return even in the 7 percent range, much lower than Connecticut’s.

Cicchetti, who said he has provided members of the working group with copies of the article and the New York Times story, said it’s crucial “to know what we are dealing with … the magnitude of the problem. A one percentage point difference means a huge amount of money.”

“If we are using numbers that are unreasonable, we need to know that,” he said.

The biggest problem Cicchetti sees is health care for retired state workers, who receive full coverage, without any premium for themselves and their spouses, from age 55 to 65. That is an unfunded liability projected at more than $25 billion, higher than the state’s annual budget of $18 billion.

The New York Times March 8 article by reporter Mary Williams Walsh is an eye-opening account of how state pension funds are moving into riskier investments – unlike private pension managers who are doing just the opposite, moving into safer bond investments.

“In effect, they’re going to Las Vegas,” Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state, told Walsh.

“Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now,” she wrote. “Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.”

Professor Petersen’s answer is to do what private firms have been doing over the last few years: Terminate fixed benefit programs.

“Freeze the promised benefits as of a certain date,” he recommends. “Though unpleasant for public workers, it’s preferable to the unsustainable arrangement in which governments default on pension payments. While drastic, it brings decision-making into the bright light of the tough choices in an aging, slow-growth, high-risk economy.”

Now let’s see if we the voters have the smarts to elect representatives and a governor who have the courage to meet this challenge, because I can assure you, most of the unions will fight this tooth and nail.

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11 Comments on "Ct Pension Debt May Be Even Worse Than Projected"

  1. A retired state police sergeant puts in 20 years and retires with an $80,000 pension. So, what the hell are the colonels, captains, et al, making when they retire?? This has been out of control for a long time. There is no easy answer. Residents of CT need not wonder why their taxes are so high.

    • Bob Hindle | March 22, 2010 at 9:14 am |

      So George, are we anti-government worker, are you a Tea-bagger now? Are you prormoting corporations dropping health coverages for workers? Are you advocating no pensions or healthcare for retirees? Shall we privatize everything? Send jobs offshore?
      Pray tell, what do you think will happen to all these people? Move in with the kids? Beg in the streets? Shall we go backwards a century or two, George?
      I would think that one so familiar with government waste would not have to jump on the tea-bag express and join the demonizing chorus against public employees. Sure there are ridiculous examples of excess that need to be addresssed (rationally) but you know that the remedies likely to be imposed will be on the regular workers while the fat cats at the State Police or UCONN just get fatter, and pointing that out is your job.A peoples advocate should be advocating for more and better pensions for more people. You know that the corporations are taking everyones share of the pie and yet you go after the little guy. Why did our fathers and mothers fight so long for a system that allowed for a comfortable, safe retirement. Then, when the corporations decided to make more money by crapcanning pensions they were able to demonize workers with pensions by pitting those without against those with. All the while the corporations colllected more and more.
      I bet you are without.

      • George Gombossy | March 22, 2010 at 9:44 am |

        Bob – thanks for taking the time to write. Unfortunately we can no longer give away the store to state workers – who on the average earn more than private workers – I am not suggesting we take away their pensions that they earned. I am suggesting we need to face reality, which includes that we have to pay for what we have promised – and we must do like private industry has done and cut back benefits for future state employees. Why should state employees get the same health benefit – without one cent for premium when they retire at 55 – that our military gets after 20 years of service – much of it in combat? Is that fair, while the rest of us have to do without.

        • Golly George, where did you come up with the private vs. public averages? That’s a new one on me. The reality we are facing is that a tiny percentage of the private sector controls an unconscionable share of the national wealth and you seem to want to be their puppet. I’m a Capitalist, they can have X billions, but when they start to squeeze us (consumers) for XXXX billions, that’s where your attention should be. Oh, and State Employees get the “same” benefits as the military, really? Do you know that or are you just Fox Newsing facts? Who told you that State workers ( that would be your neighbors, maybe your Aunt and Uncle, your cousins,etc.) don’t pay “one cent” after 55, I don’t think that’s correct either. I’m not sure why you are bringing the military into this, I guess it’s part of the demonizing, a chance for you to wave the flag. But since you did, BRING THEM HOME! We are borrowing from China to support these immoral adventures. Without the wars the financial picture would be totally different , we are breaking our own back.

          • Bob,

            What do you mean by “national wealth?” As far as I know, there isn’t such a thing, except in socialist states. It’s clear that you have a bone to pick with successful people who want to enjoy the fruits of their labor.

          • Bob,

            Here’s an article “Spending Cuts Require Showdown With Public Unions.”


            which states:

            “At the state level, according to the Employee Benefit Research Institute, government workers have been collecting nearly 50% more in total compensation than the average private sector employee, with taxpayers subsidizing 128% more than private employers to fund healthcare benefits and 162% more on retirement benefits.”

            I suggest that you read it or Google “Public Employee Pensions” to see similar articles stating essentially the same.

            Strange, the only (rarely) posted articles which I see refuting the cited and similar articles always bring in annecdotal personal comments as you did about “your neighbors, maybe your Aunt and Uncle, your cousins,etc.” Why the emotional tear-jerker and attacks on Fox News instead of providing sources to back up assertions?

  2. George,

    I totally agree with you. I am sorry if anyone disagrees, but it’s clear that state wokers have it much better than many private sector workers…those of us in the private sector actually have to fund our own retirements, God forbid. I can see some merit in having pensions for people who put their lives on the line (police officers, etc) but the guy fiing papers at the Secretary of State’s Office should not be getting one dime of my money towards his pension.

    And if we could strike a balance between the “fat cats” that Democrats demonize (because they, God forbid, worked to get where the are) and the total idiots that work at most state agencies, we would be better off.

  3. The real issue is that we can’t afford to pay these people the salaries they’re getting, no less the retirement benefits. In good times, this was fine but now, we just don’t have the money. It’s that simple. These retirement benefits and salaries need to be reduced. If they are mandated, the mandate needs to be changed. The party’s over….it’s been over in the private sector for 10 years (except for the big boys upstairs).

  4. Former State Employee | March 23, 2010 at 10:23 am |

    As a former state employee, can attest there are many employees earning far more working in the State system, than they would in the private sector. Worse yet, many of these same people “retire” from the State, collecting almost as much in retirement, as they made while on the job, + health benefits for themselves, and often a spouse. That’s ludicrous.

    Recently learned about http://www.ctsunlight.org/ Well, what an eye opener this site is. Little wonder the State is in such terrible fiscal state.

  5. Dear George,

    I greatly admire the work you do, but I thing you’ve been taken in by a deceptively compelling right-wing campaign–that includes the Yankee and Cato Institutes–to end traditional pensions. These are the same forces behind the campaign to end Social Security and they use a similar argument that neither program is financially sustainable.
    In the interests of full disclosure, I am a state employee since I teach at Eastern. However, I am not in the state pension plan. Rather, I am in the Alternate Retirement Program—the program that the right wingers would like to see all state employees forced into.
    I can tell you from bitter experience that it does not work. We pay over twice as much in contributions as our colleagues in the traditional pension do, yet we will receive less than half as much in retirement benefits. On top of that, and contrary to what the right wingers would have you believe, our retirement program actually costs the state more than the traditional pension does. Forcing state employees into this program will be more, not less, expensive for the state and taxpayers.
    How is that possible? It is because of the enormous rake off that the financial services industry and Wall Street take from 401(k)-like plans, which ours is. Because of that rake off in profits, commissions, and management fees, those plans are both more expensive and less generous than the traditional pensions that they replace. They do a great job of supporting the financial services industry and Wall Street but not of supporting retirees.
    The only reason there is an unfunded liability for the pension is because the state has not properly funded it over the years. Slight reforms would bring it back into balance. There is no imminent crisis.
    Everyone deserves decent retirement security. The way to get there is to keep defending Social Security for all and get back pensions for those who have lost them to 401(k)s. Taking pensions away from those who still have them will only add to the race to the bottom.
    For further reading, the National Institute on Retirement Security has a very revealing online report that I highly recommend: “A Better Bang for the Buck: The Economic Efficiencies of Pensions.”

  6. growing up in West Haven, SNET, the Railroad, Sikorsky, Pratt, Avco, all the insurance companies etc were essentially government run “private sector” companies with benefits to match any govt job. SNET and the Railroad (both of which were impossible to get a job at without family connections) especially made many a retiree well to do. That pretty much died in the late 80’s but nobody has picked up on it yet. There will me no more SNET, UTC, railroad retirees and bank/insurance are hardly here anymore. If you got a job in 1970 you are fine in those areas- however later you are done. IBM and GE cut off defined pensions 20 years ago as well. The public unions will blame us for caving but they have no pressure from outsourcing, etc.

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