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Legislators concerned about spiraling state pension obligations

By Johanna Somers

Publication: The Day

Published January 24. 2013 4:00AM   Updated January 24. 2013 1:44PM

State pension costs increased more than 580 percent in the past 20 years, to $900 million annually from $130 million annually, while Connecticut's population has increased only 9 percent, the Connecticut Business & Industry Association reported on Wednesday.

Union contracts and state employee perks need to be evaluated again, said state Rep. Diana Urban, D-North Stonington, a member of the Appropriations Committee.

"I think we need to get people to come back to the table," Urban said Wednesday.

Health benefit costs for state employee retirees increased more than 980 percent in that 20-year span, to $640 million annually from $60 million annually, according to the association's report.

The governor and state legislature have increased taxes, negotiated with unions, combined state agencies and cut spending in various sectors, but the state's budget deficit continues to grow. Just last week, this year's budget deficit increased to $70 million from $40 million based on decreased revenue projections.

The governor and legislature have an estimated $2.13 billion budget deficit to tackle in the 2014-16 biennium. No one in the governor's administration would be commenting on the upcoming budget proposal or pensions and retiree health benefits specifically, said Steve Jensen, director of communications for the Office of the Lieutenant Governor, in an email Wednesday.

Previously, the governor's administration and Democrats have said the poor economy was the reason for continual budget deficits, but the CBIA report states that the problem is structural.

Guaranteed, generous retirement benefits to state employees have created unsustainable long-term costs for taxpayers, the report said.

The state has also not been sufficiently funding the state pension system. The funded ratio - pension fund assets divided by its liabilities - was 42.3 percent, according to the most recent actuary report prepared on June 30.

The state's pension fund had $9.7 billion in assets and $23 billion in liabilities, the report said.

An 80 percent funded ratio is commonly cited as healthy, but according to the American Academy of Actuaries based in Washington, D.C., pension obligations should be fully funded at 100 percent.

Despite the state's fiscal problems, the CBIA and some legislators said that Gov. Dannel P. Malloy's administration has started to fix the pension system.

For example, the state is required to contribute $123 million in fiscal year 2013 to the pension fund, according to the governor's midterm budget adjustment report. These annually required contributions are set to increase for fiscal years 2014 to 2025.

Other reforms from 2009 and 2011 negotiations with state employees included requiring all health care eligible employees, with phased-in implementation, to contribute 3 percent to the Retiree Health Care Trust Fund.

"In all fairness to Governor Malloy's team, I think they have been tackling these issues with more seriousness and vigor than may have been the case in the past, but again, they have bigger problems," said Peter Gioia, vice president and economist for the CBIA.

Gioia said the state employees, however, have not done their part. The governor promised the state employees no layoffs in return for costs savings, but those haven't materialized, he said.

Urban said pensions and benefits had to be re-examined because times have changed.

The government used to offer great benefits to attract people away from the private sector, she said.

Now, "people would give their left and right arm for a government job," Urban said. The private sector doesn't have benefits that compare with public-sector benefits, she said.

Benefits for the public sector are much higher than for the private sector, in part because the public sector has pensions while the private sector often has 401(k) plans, said Don Klepper-Smith, chief economist and director of research for DataCore Partners.

"Health benefits that state people have, general speaking, are quite superior to what we are seeing in the private sector," he said.

According to the state's Commission on Enhancing Agency Outcomes 2008 report, state employees contributed $1,517 annually on average to medical and health insurance while private employees contributed $2,380 on average.

It's unlikely that Connecticut will see enormous economic growth in the near future in order for revenues to solve the economic problem; therefore, negotiations with the union and efficient government are necessary, Urban said.

A quick fix, though, is "not likely," she said. "I think we are going to have to chip away at it."

A number of bills have been proposed recently to address the issue.

Gail Lavielle, R-Wilton, and an Appropriations Committee member, introduced House Bill 5009 to phase out defined benefit pensions for state employees and replace them with defined contribution retirement plans or 401(k) plans. She also introduced House Bill 5191, which requires all state employees to contribute 6 percent of their salaries annually to the state employee retirement system.

When asked whether she thought union contracts would be renegotiated, Lavielle said, "Most of the time, I would say, are you kidding. I am a little less pessimistic now because fiscally (speaking), the state is back up against a wall."

j.somers@theday.com

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CBIA RECOMMENDATIONS

• Leaner government: Require every major state program and agency to adopt performance-based budgeting systems; upgrade the state's information technology system; and modify union rules to allow for reassignment of state employees based on priority needs.
• Rebalance long-term health care: Make home-based care accessible; provide a greater portion of community-based health care for Medicaid recipients; and expand the use of nonprofits.
• Reform the correction system: Increase the use of nonprofit programs; use proven re-entry programs for people who have been incarcerated for two years or less; and reform medical retirement benefits to increase the number of years of service required for correction personnel to receive benefits for "hazardous duty."
• Modify state employee retiree benefits: Cap the maximum per-year pension payouts at $100,000; end the use of overtime to increase state employee pensions; and increase medical co-pays for all existing retirees in five years.
• Expand the use of quality nonprofit agencies: Require state agencies to conduct results-based accountability to determine the efficiency of state programs and services; streamline contracting procedures for nonprofits; and promote strategic planning that analyzes the risks and benefits of provider options.
Source: Connecticut Business & Industry Association

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