Facing a future of escalating pension costs that could imperil the state budget, Office of Policy and Management Secretary Benjamin Barnes recommended Tuesday that the state make significant changes to the retirement system for state workers and teachers.
The changes would serve to lengthen the amount of years it would take for the state to fully fund its system, which currently has a $26 billion unfunded liability. Pushing that deadline past 2032 could reduce annual impacts to the state budget.
Much of that unfunded liability has been created since 2000, when investment returns began to worsen compared to historical averages.
Barnes based his recommendations on a commissioned report from Boston College’s Center for Retirement Research, released to the public on Tuesday.
Among Barnes’ recommendations:
- Split the state-employee fund into two funds, making one a closed, “pay-as-you-go” plan for more expensive longtime retirees, and the other an open plan for active employees, funded on an actuarial basis.
- Lower investment-return expectations in its employee and teacher plans, which will require greater annual contributions in the near term, but help avoid a spike to approximately $5 billion around 2032 (last year’s state contribution was approximately half that amount). Some of that work has already begun. The Connecticut Teachers’ Retirement Board, which oversees approximately $16 billion in investment assets, voted this month to lower the plan’s assumed investment return from 8.5 percent to 8 percent — the same as the state employee plan’s assumption. But Barnes said state government should work with both plans to gradually reduce those expectations to 7 percent.
- In order to avoid back-weighted calculations of the state’s contribution, change those calculations from a “level percent of payroll” method to a “level dollar” amortization.
A variety of questions remain unanswered, Barnes wrote. Some changes may require bargaining with the State Employees Bargaining Agent Coalition. It’s also unclear what the exact impact will be on the state’s unfunded pension liability calculation, and how the split might affect the state’s credit rating.
But Barnes said the changes are worth making because the projected rise in state contributions 15 years from now “presents the greatest long-term budget challenge facing the state.”
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