Why Gov. Malloy should sign the legislature’s budget bill

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The State of Connecticut has no budget. That fact will surprise few. However, what may surprise some is that the General Assembly passed a budget that is bipartisan, introduces multiple long-term, cost-saving structural reforms, and, as Gov. Dannel P. Malloy often insisted, does not lead with new revenue in a state already overburdened with taxes.

Why is that budget not already law?

In a recent statement to the media, Gov. Malloy said that while he still needed to fully analyze the budget, he already knew enough to know he would veto it. Among his complaints were its non-bailout of Hartford, reductions in taxpayer subsidies to the University of Connecticut, and what he described as “irresponsible changes to pensions” that “[don’t] fully fund actuarial pension contributions.” It is this last charge that is the most damning, if true; but it isn’t.

Connecticut’s two largest state-administered pension plans are the State Employee Retirement System (SERS) and the Connecticut State Teachers’ Retirement System (CTRS). Both currently suffer poor funding ratios and, relatedly, both hold substantial unfunded liabilities. As of 2016, CTRS was only 56 percent funded with unfunded liabilities of more than $13 billion. SERS, meanwhile boasts liabilities of greater than $21 billion and a funded ratio of approximately 35 percent.

Clearly, both systems need reform and mistreatment of either is a grave mistake. The problem, though, is that these plans have been mismanaged and mistreated for years, even in the best of times. Beyond the initial problem that the pension plans offered are unaffordable and unsustainable, the actual administration of the plans has also exacerbated the underlying issues.

One universally-accepted way to manage pension obligations is to take the plan’s current assets and invest them to earn a return. This way, future liabilities can be partially offset, potentially reducing the amount of taxpayer funds the state must contribute to make good on its obligations. This strategy only works, however, when the expected rate of return and the actual investment returns are consistent with each other.

To imply that the new budget would mistreat state pension systems any worse than they currently are is difficult to accept.

For example, Connecticut’s pension plans anticipate relatively high rates of return, 8 percent for CTRS and 6.9 percent for SERS. (It should also be noted that these rates actually reflect reductions in previous expectations of 8.5 percent for CTRS and 8 percent for SERS). These high returns have not been routinely achieved of late, even during a recovery period for the market.

As of 2016, the 10-year return for CTRS was merely 4.8 percent. SERS’ most recent 15-year return was 5.4 percent. Both are well below their plans’ assumed rates, and as a result, a leaky pitcher scenario has manifested. Liabilities have been growing despite the state making its required annual contributions, and the state just can’t keep the pitcher full. The growing liabilities could not entirely be the fault of the recently passed budget.

Additionally, the argument that it is not possible to implement structural pension reforms, even after SEBAC expires, holds less water than the leaky pitcher. The recently passed budget leverages considerable anticipated future savings that result from the kind of structural reforms the state has needed for a long time. Absent a binding agreement, the presumption should certainly be that the General Assembly has the authority to set basic pension policy. The future savings proposed in the bipartisan budget are not illusory; they are real, and they stem from solid, well-thought-out reforms.

Lastly, in his latest proposed budget, Gov. Malloy had a convoluted plan to manage CTRS’ crippling liabilities. Given this, one would think he would be more open to forward-thinking and creative pension reforms. State contributions to CTRS are expected to grow from an already-sizable $1 billion per year to more than $6 billion in 2032. In anticipation of that, Governor Malloy’s proposal to rebalance CTRS involves shifting costs to the municipalities, but also rearranging the payment structure.

The details of that plan are complicated and, given the promise of renewed budget negotiation talks, Gov. Malloy’s proposals may or may not end up moot. However, one thing is clear: the bond covenants that the state entered into in 2008 to keep CTRS solvent are much higher barriers than a future expired and void collective bargaining agreement is to SERS.

The bipartisan budget that recently passed the Assembly is not perfect. No budget is. Connecticut will need more than one or two budget cycles to correct decades of mismanagement and restore the confidence of taxpayers and businesses. Given the creative, albeit perhaps questionable, ways in which Gov. Malloy is attempting to attack CTRS’ unfunded liabilities, the budget before him should be given more consideration for its equally creative attempts at resolving SERS’ structural problems.

Joe Horvath is the Director of Legislative Outreach for the Yankee Institute for Public Policy.

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