What Connecticut Has in Common with Detroit
Connecticut has some pretty neat things in common with Detroit—like the automobile industry (we started in 1895 with the Pope Manufacturing Company’s “horseless carriages”) and early professional baseball (the 1876 Hartford Dark Blues, charter members of the National League, played ball before the Detroit Tigers hit the field in 1894).
Today, not so much in common with the Motor City. And given Detroit’s recent bankruptcy, that’s not something we really want to aim for.
But a new report from CNBC (“Pandemic of pension woes is plaguing the nation,” August 5, 2013) shows how some might draw some similarities between Detroit’s plight and Connecticut’s fiscal challenges.
Much of Detroit’s problem stems from promising public employee pensions far more generous than taxpayers can fund.
Motown is not alone, and CNBC lays out the huge financial obligations facing many states–including Connecticut–for public employee pensions and teachers’ retirement benefits.
According to CNBC:
- Connecticut’s state pension accounts (for state employees and public school teachers), are funded, on average, only at 55%; the rule of thumb is to have at least 80% funding in hand (Source: Fitch Ratings, Center for Retirement Research)
- Connecticut’s per person pension debt is 5th worst in the U.S., representing 18.6% of personal income (Source: Standard & Poor)
- Funding for the state pension accounts has been declining (for state employees, 51.9% funded in 2008 versus 42.3% in 2012; for teachers, 70% in 2008, versus 55.2% in 2012). (Source: Fitch Ratings, Center for Retirement Research)
- There are fewer active state employees and fewer teachers contributing to the retiree funds (1.4 active pension members per retiree or beneficiary in 2008, and 1.1 in 2012; 1.8 in 2008 and 1.5 in 2012 for teachers) (Source: Fitch Ratings, Center for Retirement Research, Public Fund Survey)
- Under new and more transparent accounting rules that go into effect next year, Connecticut’s pension debt more than doubles, from $20 billion to more than $41 billion (Source: Moody’s) (Says CNBC, “the Government Accounting Standards Board, which sets the bookkeeping rules for pension plan managers, … [will require] underfunded plans to put away their rose-colored glasses when estimating future investment returns.”)
Since the Great Recession officially ended in 2009, “all 50 states have undertaken ever-more intense reforms as the pension funding problem deepened,” says CNBC. “The list includes suspending cost of living increases for retirees and shifting some of the investment risk on future retirees with the addition of a defined contribution plan similar to a 401(k). Some states have gone further by raising employee contributions or shifting the entire burden onto new workers with defined contribution plans.”
To be sure, Connecticut has made some recent progress in reducing its pension debt and introducing some reforms.
But more can be done. A recent study found that state employee benefits in Connecticut are better than most every other state in the Northeast. State employees contribute a nominal amount to their pension accounts (from 0% to 2% of their salaries, compared with a range of 5% to 12% in Massachusetts; 7% in New Hampshire; and 6.25% in Pennsylvania).
With Connecticut state employees contributing such a modest amount to their pensions, taxpayers have to bear much more of the burden of state employee retirement accounts than do residents in other states.
Connecticut also has moved to a more conservative, five-highest-paid-years calculation for determining a retiree’s final average salary—for only the most recently hired employees. And pension calculations still include overtime, which has sometimes been found to be overly generous. Could both of these areas be ripe for reform?
The Connecticut Institute for the 21st Century has also weighed in on many reforms that the state could and should consider.
We don’t want to follow the way of Detroit. Committing to finding ways to reform state pension accounts and make them more affordable is imperative to keeping us on higher fiscal ground than currently is the Motor City.
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