Taming the Giant: Reforming State Retiree Benefits

02.11.2011
Issues & Policies

If the bill somehow came due today for Connecticut’s obligations to state employees for their retirement benefits, every man, woman and child in the state would have to hand over $12,000.

Throw in the rest of Connecticut’s long-term debt to pay back state borrowing, and the check would have to be upped to $19,900. The tab for a family of four would be $79,000.

It sounds crazy, and it is. On top of the state’s budget gap of $3.7 billion for fiscal year 2012, Connecticut’s unfunded liabilities of $70 billion represent the worst per capita debt load in the nation. Most of it, $42 billion, is the state’s obligation to public sector employees for their retirement benefits.

Undermines confidence

Nothing has undermined business confidence or economic recovery in Connecticut more than the state’s monumental fiscal crisis.Negotiating retiree health and pension benefits to make them more sustainable would go a long way to renewing private-sector confidence in Connecticut.

In fact, Gov. Malloy recently said, “For Connecticut to move beyond its current economic crisis, … we're going to need to make headway with our employees on returning to a sustainable system of compensation and benefit allocation.”

This week, the Connecticut Regional Institute for the 21st Century released its latest study that compares Connecticut with other states on the handling of its long-term debt for public-sector employees.

While Connecticut has been among the slowest of states to respond to the debt problem, the good news, says the Institute, is that there are lessons we can learn from other states.

Pension Reform

Since the national financial meltdown in 2008, the tension surrounding the fiscal health of states’ retirement programs “has been especially intense,” says the Institute. 

In the last two years, 40 states took at least one action to modify their state employee pension programs. This year the pace is quickening.

Most frequently, says the Institute, states have either raised employee contribution rates or adjusted state contributions. The changes mostly affect newly hired state workers, but some states are exploring calling for higher contributions from current employees. 

Many states have changed the income-averaging period from a three-year average to a five-year average. Some states have also raised threshold retirement ages and frozen cost-of-living adjustments.

Thirteen states have moved away from defined benefit plan (which provides a monthly benefit to participants at retirement) to a defined contribution plan similar to 401(k) plans offered by private-sector employers.  

Often, states are adopting several reforms. Illinois, for example,raised the retirement age for its new employees from 60 to 67, the highest of any state, and capped the salary on which public pensions are figured.

The state also ended double-dipping, the practice of receiving a public pension and a second salary from a public entity. (Nearly 20 states also do not allow state employees to leave state employment for another employer and then return many years later to collect retiree medical benefits.)

Healthcare benefits    

The largest portion of the $42 billion benefits debt is for state retiree healthcare benefits. Connecticut is meeting its healthcare obligations for its current retirees but often fails to meet the requirement for future retirees. While the state paid $457 million in 2009 to insure current retirees, the state failed to set aside an additional $1.5 billion to cover the future costs of current employees.

Connecticut and many states use a pay-as-you go system for funding retiree health benefits, instead of setting aside money while the employees are working. Now, some states are abandoning pay-as-you-go and moving to a system that funds benefits in advance through dedicated trust accounts.  

States also are requiring their current employees (and in some cases those who have already retired) to contribute to, or increase their contributions to the funds. Some are tightening eligibility requirements to require more years of service before retirees gain access to benefits; others are encouraging early retirements in order to increase the number of new hires, and therefore, people contributing to their benefits systems.

Connecticut nowrequires new hires to contribute 3% of pay for the retiree medical plan for their first 10 years of service. They must also have at least 10 years of service, or based on age and service, meet the rule of 75, in order to qualify for the benefits.

Much needs to be done to reduce Connecticut’s extraordinary and economy-stifling debt. “It’s critical for a sustainable state budget that the public-sector unions meet with Governor Malloy as he has requested and agree to changes in these areas,” said CBIA economist Pete Gioia.

For more information, contact Pete Gioia at 860.244.1945 or pete.gioia@cbia.com.

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