Retired Connecticut state employees received the highest annual pensions in the country in 2011, despite contributing less out of their paychecks than the national average. That meant the state's pension system was the second-most underfunded in the United States, in worse shape than every other state's except Illinois'.

Connecticut would have to allocate about $70 million in additional funds each year for 18 years to close the funding gap in the major state employees' pension system, according to actuarial estimates. And that wouldn't address the $11 billion gap in the teachers' retirement system, which would need tens of millions of dollars more every year during that same period.

To demonstrate the size of the problem: It would cost each man, woman and child in the state $12,157 to close the $44 billion funding gap afflicting the state's two largest pension systems and its two retiree health benefit programs. Since the mid-1990s, the state rarely has met its required contribution, although it did so in 2013.

Now, closing the gap means either higher taxes, more borrowing, new sources of revenue or less to spend on education and social services or - more likely - all the above.

"There is a financial time bomb that is ticking," said Art Renner, executive director of the Connecticut Society of CPAs. "If we continue to let elected officials ignore these problems at some point in time, we are going to find ourselves in a similar situation as Detroit or Illinois, which are in bad shape. We would prefer Connecticut to avoid that."

The Day conducted a months-long investigation of the state's union-negotiated employee pensions and the system that administers pension and health benefits for retired public school teachers. The investigation, which included dozens of interviews and Freedom of Information requests for documents, shows:

• The average annual pension in 2012 was $31,666 for a retired state employee and $47,386 for a public school teacher or administrator. Most state retirees also earn Social Security; public school retirees do not.

• The average total employee contribution is $20,355. For teachers, it's about $271,333, although that figure includes payments for annuities for about 40 percent of the retirees.

• In 2012, the top state pension earner was a retired state employee who received $276,364, according to data from the state comptroller's office. He is in the state's Tier I for retirement - the oldest, most generous and now closed tier. Of the 45,455 retirees who were collecting retirement in 2012, two-thirds (30,472) were in Tier I.

• The average Tier I retiree's annual pension in 2012 was $36,404. The Tier II average was $23,106. Tier III's was $11,556.

• Among public school teachers and administrators, the highest annual pension benefit in 2012 was $199,926.

• State employees retired at an average age of 57.1 in 2012. Public school employees, on average, retired at age 60.1.

• The average length of time a state employee is expected to collect retirement benefits is 28.6 years; for a public school employee, 25.6 years.

• As of October, 23 percent of pension checks for retired state employees and 26 percent for public school retirees were being mailed out of state.

• State employees retired most frequently after 20 years. Public school workers retired most frequently after 35 years.

• The core bargaining units with the highest annual pensions for their individual members, on average in 2012, were those representing employees in these departments: UConn Law School faculty, $97,962; Department of Public Defender Services, executive public defenders accounts, $92,658, and chief public defenders, $88,765; Judicial Department judges, $82,352; and Auditors of Public Accounts, $77,501.

• "Hazardous duty" staff from the state Department of Emergency Management and Public Protection, including state troopers and sergeants, contributed $34,410 on average during their careers and collected average pensions of $59,893 in 2012.

• Of the 82 state troopers, dispatchers and sergeants who retired in 2011, 21 - nearly 26 percent - had a spike in their overtime pay during the last three years of service, which increased their annual pensions.

• In 2012, former Gov. Lowell P. Weicker Jr. collected an annual pension of $34,222; former Gov. M. Jodi Rell collected $61,869; and former Gov. John G. Rowland collected $30,642 for his first eight months of retirement.

Meeting commitments

In interviews with The Day, neither Senate Minority Leader John McKinney, R-Fairfield, who is running for governor in 2014, nor House Speaker Brendan Sharkey, D-Hamden, said they are interested in reducing pension payments to retired employees. Gov. Dannel P. Malloy's budget chief, Benjamin Barnes, also said commitments to retirees should be fulfilled. Barnes and Sharkey said significant changes have been made that will affect the pensions of current employees, and that they are committed to those changes.

McKinney, however, said more changes are needed and the next governor "is going to have to look at opening up the contract again and make sure that we have an agreement in place with state employees that better reflects the economy we live in."

The state needs to examine 401(k)-type plans for new employees and contribution rates for current employees, McKinney said.

Malloy, however, said he does not foresee reopening the State Employees Bargaining Agent Coalition agreement in the next four years. SEBAC negotiates on behalf of 15 unions that represent about 45,000 state employees.

"What I foresee is executing the changes that we have made and making sure that we maximize those benefits," Malloy said.

Malloy's administration negotiated the SEBAC 2011 Agreement, which required all state employees to contribute to their retiree health care fund for the first time. The agreement includes creation of a new pension tier that increases retirement age. In 2012, Malloy's administration also terminated former agreements with the unions that had permitted the state to contribute less than actuaries recommended to the Connecticut State Employees' Retirement System.

In the fiscal year ending June 30, 2012, $1.7 billion of the $20 billion state budget was earmarked for the two major pension funds, the Connecticut State Employees' Retirement System and the Connecticut State Teachers' Retirement System.

Of that, about $533 million was for public employees who have yet to retire. More than twice as much - $1.2 billion - was for retirees.

As the state puts money into retirement funds, money flows out to retirees. In 2012, money was channeled into the state employees' retirement fund not only from the general fund but also from the transportation, banking and insurance funds as well as from the higher education system and from federal appropriations. The teachers' retirement fund also received contributions from the general fund.

Employee contributions and investment returns also go toward funding pensions.

In 2012, about $1.4 billion was paid to retirees in the state employees' retirement system and about $1.5 billion went to retired teachers. The assets of the two major pension funds that year totaled $22 billion.

Changes in Illinois

As more money is distributed than is appropriated by the state, and investment returns fluctuate, the state's liability gap for the two main retirement systems continues to grow.

Averaged together, these two pensions in 2012 were funded at 49 percent when they should have been funded at 80 to 100 percent, according to experts. The Connecticut State Employees' Retirement System was funded at 47.9 percent in 2011, according to actuarial reports. That decreased to 42.3 percent in 2012. The teachers' retirement system went from being 61.42 percent funded in 2010 to 55.24 percent in 2012.

When measuring obligations against state revenue, a report in 2013 from Moody's Investors Service, the credit rating agency, found the state's pension liabilities to be three times greater than the average of all states in 2011. Connecticut's unfunded pension liability was 189.7 percent of its revenue.

Only Illinois was worse, with its unfunded liabilities recorded as 241.1 percent of its revenue. And last month the Illinois legislature passed and its governor signed into law an increase in the retirement age and a reduction in retiree cost-of-living adjustments, with the intent of cutting pension spending by $100 billion over the next 30 years. A group representing the retired state workers has filed two lawsuits challenging the changes.

Connecticut's pensions are invested in a broad portfolio including mutual funds, stock funds, fixed income funds and real estate funds. In fiscal year 2013, the state's pension funds earned an investment return of 11.9 percent. However, in fiscal year 2012, the same pension funds lost 0.9 percent.

For the last 10 years, actuaries hired by the state have used an assumed rate of return of 8 percent to 8.5 percent to calculate the State Employees' Retirement System pension liability. But the compounded market value rate of return during that period was only 6.9 percent, according to the state Office of Policy and Management.

In the same period, actuaries working for the Teachers' Retirement Board used an assumed rate of return of 8.5 percent, but the compounded market value rate of return during that period was only 7.1 percent.

Keith Brainard, director of research for the National Association of State Retirement Administrators, said the average investment rate of return nationally is 7.72 percent. Many public pension plans use 8 percent, he said, but the 8.5 percent rate used in Connecticut "is on the high end."

If the state were to lower its assumptions, more state funds would have to be dedicated to pensions.

The amount of money the state puts into its pension systems is significant and growing - it's just not enough.

The Malloy administration said it achieved the annual required contribution in the 2012 fiscal year. The comptroller's office reported that the state contributed $118 million less that year than actuaries had recommended.

Contributions to the two major retirement systems were the fifth- and sixth-most expensive line items in the 2013 general fund budget, according to the state comptroller's office.

Appropriations for the two pension systems climbed from 5 percent of the total budget in 2003 to 9 percent in 2013. Actuaries estimate that the total amount the state would have to contribute to these two pension systems to reach 100 percent funding is $24 billion. Even then, annual contributions from those who have not yet retired would need to continue.

The state's two retiree health benefits programs also are underfunded by billions of dollars and have a higher unfunded liability than the national average.

The health benefits program for state retirees was funded at just 0.31 percent as of 2011, according to an actuarial report by The Segal Group, a consulting firm. Total liabilities for the program were $16.2 billion. The teachers' retiree health benefit program had an unfunded liability of $3 billion as of 2012, according to a report by the actuarial firm Cavanaugh Macdonald.

The average unfunded liability for state retiree health plans was $8 billion based on 2011 and 2012 data, according to the Center for State and Local Government Excellence and the National Association of State Retirement Administrators.

State pensions are high

All of this money is going toward paying retired Connecticut state employees the largest pension benefits on average among all states.

These retirees received higher benefits than any other state's retired employees, collecting $37,953 on average, in 2011, according to Census data. Nationally, state employees collected an average annual pension of $24,139 in 2011. In Massachusetts, the average state employee pension was $32,272 that year; in Rhode Island, it was $31,263; and in New York, $26,867.

Pensions were designed to provide retirees with a source of income, along with their savings and Social Security, said Dan Livingston, the chief negotiator for SEBAC, which negotiated the 2011 state pension package.

Public sector pensions were developed in part to provide incentives for highly skilled workers to take public service jobs, which frequently paid less than similar jobs in the private sector. Over time, salaries for public and private employees have equalized. But benefits for private employees have decreased, while those for public employees have remained relatively intact, according to a 2012 Employee Benefit Research Institute report.

While Connecticut's pensions are the highest in the country, employee contributions are lower than the national average.

Teachers in Connecticut, who do not collect Social Security, contribute 6 percent of their salaries to their pension funds. Employees of other states who do not earn Social Security retirement benefits contribute 8 percent on average, said Brainard, of the National Association of State Retirement Administrators. State employees contribute 0 percent to 2 percent of their salaries. Nationally, the average contribution is 5.57 percent, Brainard said.

j.somers@theday.com

For additional pension data go to www.theday.com/ctpensionproject

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Join the conversation

As part of its

CT Pension Project, The Day has arranged for pension experts to hold live chats on theday.com this week.Monday, Julie McNeal, CPA and director of finance and operations for the Connecticut Society of CPAs, will answer questions from noon to 12:30.Tuesday, Dan Livingston, a Hartford attorney who represented the unions in the 2011 State Employees Bargaining Agent Coalition agreement, will answer questions from noon to 12:30 p.m. Check in at

www.theday.com/ctpensionproject and email your questions to j.somers@theday.com or Tweet them using #ctpensionproject