Comptroller Kevin Lembo is touting a reworking of the state’s pension funding that he said could save $1 billion. He said his solution is based on consultation with pension experts and actuaries.
In a report this week, crafted after consulting with pension experts and actuaries, Lembo described three pension funding scenarios – as well as a “baseline” scenario that allows policymakers to compare the state’s current funding policy to possible solutions.
“This concept – which I strongly recommend – would not only establish cost stability and predictability, but it would save the state approximately $1 billion in long-term pension costs when compared to the current funding methodology,” Lembo said in a statement.
He said his plan would accomplish the following:
- Lower the assumed rate of return from 8 percent to 7 percent;
- Change amortization method to level dollar (akin to a fixed-rate mortgage with equal payments throughout the term); and,
- Split the state’s unfunded liability into two categories – one category (referred to as “statutory base”) refers to the actuarial liability accumulated before and up to Dec. 31, 1983 and another category (referred to as “experience base”) for actuarial experience from 1984 to present. The statutory base liability would remain on the current 16-year amortization period, while the experience base liability would be amortized over 25 years.
Adopting the changes, he said, would deliver the following results:
- Saves the state more than $1 billion in real dollars over the course of the amortization period;
- Total costs reduced over all other pension funding scenarios, including the current funding methodology, adjusting for inflation;
- Establish a predictable and stable flat payment schedule;
- Higher projected funding ratios; and,
- Requires larger annual required contribution) payments in near term in order to reduce cost burden significantly in future years.
In addition to the recommended pension funding reform, Lembo also proposed that the state commit to regular independent comprehensive audits of the plans’ actuarial valuations to determine the reasonableness of the actuarial methods and assumptions being used.
A white paper on the proposed change is available at the comptroller’s website.
Lembo’s plan comes after Gov. Dannel P. Malloy and Treasurer Denise Nappier released their own plans for the pension system.
