CT Public Pension Benefits Are More Generous Than Any Other State In The U.S. And. 25% Higher Than ..... also necessary
Connec&cut’s Public Pensions Crisis
What’s At Stake? What Should We Do About it? What Does the Law Allow The State To Do and Constrain It From Doing? By Ben Zimmer & Christopher L. Griffin, Jr. November 2014 Ben Zimmer is the CPI’s Execu4ve Director. Christopher L. Griffin, Jr., is a CPI Fellow and an Assistant Professor of Law at William & Mary Law School.
($ billions)
Connec&cut Has Roughly $100B Of Unfunded Liabili&es Across Four Major State Re&rement Funds
$120.00
$105B
$100.00 $80.00 $60.00 $40.00 $20.00 $0.00
RTHP $47B
(4.5%) (5.7%) (8.5%) (8.0%)
OPEB TRS SERS
Reported Unfunded LiabiliHes Approximate Unfunded LiabiliHes (Discount Rate In Parentheses) at 4.5% Discount Rate Source: CPI, using data from most recent fund actuarial reports; CPI es4mates of liabili4es at 4.5% discount rate align with those of other independent organiza4ons
$0 Tennessee Nebraska Indiana Wisconsin South Dakota Arizona Idaho Florida North Carolina Virginia Oklahoma Georgia Iowa Utah Vermont Maine Missouri Arkansas Washington Texas North Dakota West Virginia Kansas New Hampshire Alabama Michigan Pennsylvania South Carolina Montana Minnesota Maryland Total Colorado Wyoming Delaware Rhode Island Louisiana Mississippi Nevada Massachusecs Kentucky New York California Oregon New Mexico New Jersey Illinois Ohio ConnecHcut Hawaii Alaska
Connec&cut’s Total Debt Per Capita (Bonded + Re&ree Benefits) Is Third Highest in United States
$45,000
$40,000
$35,000 Average CT resident owes more than $30,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
Source: State Budget Solu4ons Jan. 2014 Debt Report
Connec&cut’s Re&ree Benefit Debt Results From Unsustainable Benefit Levels, Not Insufficient State Contribu&ons JP Morgan June 2014 Report: CT Spends Highest Percentage of State Revenue In The Country On Debt Service & Payments Into ReHrement Funds (20%)… …Yet Would Need To Double that Percentage To Fully Fund ObligaHons U.S. Census August 2013 Pension Survey CT Public Pension Benefits Are More Generous Than Any Other State In The U.S. And 25% Higher Than Neighbors’ (NY, NJ, MA, RI) Average Illustra4ve charts on next three pages
Percent of State Revenues Spent on Debt Service and State Employee Re&rement Funds (JP Morgan Chart)
Percent of Current Revenue States Would Have To Pay To Fully Fund Long-‐Term Debt (JP Morgan Chart)
$0.00 North Dakota Kansas Montana Tennessee Wyoming Iowa Vermont South Dakota West Virginia Indiana Idaho North Carolina Delaware Oklahoma Arkansas New Hampshire South Carolina Maine Florida Michigan Minnesota Nebraska Mississippi Virginia Texas Maryland Arizona Washington Alabama Kentucky New Mexico Louisiana Utah Missouri Hawaii Alaska Wisconsin Pennsylvania Ohio New York Illinois Oregon Georgia New Jersey Nevada California Rhode Island Massachusecs Colorado ConnecHcut
CT Public Pension Benefits Are More Generous Than Any Other State and 25% Higher Than Neighbors’ Average Average Annual Payment Per Beneficiary
$40,000.00
$35,000.00 CT average = $38K
$30,000.00
$25,000.00 NY, NJ, RI, MA combined average = $30K
$20,000.00
$15,000.00
$10,000.00
$5,000.00
Data from U.S. Census Pension Survey Published August 2013
Debt Service & Re&rement Fund Payments Are Driving Up Taxes And Crowding Out Other Government Investments Approximate Growth, 1992-‐Present 1200%
980%
1000% 800%
580%
600% 400% 200% 0%
10%
65%
200% 130% 155% 155% 70% 105% 120%
270%
Source: CPI Analysis of CT Office of Fiscal Analysis Budget Sheets, CBIA, U.S. BEA, U.S. DOL BLS
CT Demographics CT State Taxes & Fees CT State Gov’t Spending
Along With Other Factors, This Is S&fling Our State Economy Non-‐Farm Employment: As of Sept. 2014, U.S. Had Regained 112% of Jobs Lost in Recession, While CT Had Regained 72% of Jobs Lost 139,000,000 137,000,000
133,000,000
Sep-‐14
Apr-‐14
Nov-‐13
Jun-‐13
Jan-‐13
Aug-‐12
Mar-‐12
Oct-‐11
May-‐11
Dec-‐10
Jul-‐10
Feb-‐10
Apr-‐09
Sep-‐09
Nov-‐08
Jun-‐08
Jan-‐08
131,000,000 129,000,000
1,730,000
6.00%
1,710,000
5.00%
1,690,000
135,000,000
Change In Quarterly InflaAon-‐ Adjusted Wage & Salary Disbursements, Dec. 2010-‐March 2014
1,670,000
USA
1,650,000
CT
3.56%
4.00% 3.00%
1,630,000
2.00%
1,610,000
1.00%
1,590,000
4.76%
-‐0.03% 0.00% CT
New Eng.
-‐1.00%
Source: CPI Analysis, using data from U.S. Dep’t of Labor Bureau of Labor Sta4s4cs and Fed. Reserve Bank of Boston
USA
CPI Proposals For Public Pension Reform in CT 1
Require that CT public pensions follow same accounHng rules as private sector defined-‐benefit plans.
2
Reduce unfunded liability through some combinaHon of: A. Bringing annual benefit levels in-‐line with neighboring states through changes to the benefit formula;
• In 2011 Rhode Island froze all COLAs until the state’s pension plans are at least 80% funded. At that point, adjustments will be capped at 4% and will apply only to a retiree’s first $25,000 of pension income. The same year Maine suspended COLA increases for three years, after which annual increases will be capped at 3%.
B. EliminaHng loopholes (pension padding, double-‐dipping, etc.);
• Connecticut’s own State Post-Employment Benefits Committee recommended in 2010 that Connecticut cap annual COLA increases at two percent, the current minimum.
C. Increasing employee contribuHons;
• According to Gabriel Roeder Smith & Co., an actuarial and pension consulting firm, each 1 percentage point of additional COLA can add more than 7% to a plan’s total costs.
D. Raising reHrement age.
3
Example change to benefits formula: temporarily freezing and / or permanently reducing Cost of Living Adjustments (COLAs) • COLAs are automatic annual increases to pension benefits. In Connecticut they range from 2% to 7.5% per year, depending on inflation and the particular pension package a worker chooses.
Move new state employees to defined-‐contribuHon plans, with high state contribuHons and safeguards to help insulate reHrements from market risks.
State Public Pension Reform And Ensuing Li&ga&on Case Studies Rhode Island, Utah, New Jersey Forecas&ng Li&ga&on Outcomes in CT Contract Claims, Property Claims, Sovereign Immunity Defense Details on Following Slides
ERSRI’s assets from 2000 to 2010 was 2.28 percent.25 This average return was not an outlier: A March 2011 study on the investment performance of definedbenefit plans found that the national average-weighted median rate of return was 3.68 percent during the decade 1999 to 2008.26 In 2011, the state’s actuary recommended adjusting assumed rates of return. As a result, the 2010 numbers were revised down to give a funding ratio of 48.4 percent and an unfunded liability of $6.8 billion (see Figure 2). The Pew Center on the States reports that in 2010, Rhode Island’s combined funding ratio was
The Experience in States, Rhode Island: the second worst in the United behind only Illinois. Background 27
Figure 2: UAAL & Funding Ratio, 2000 to 2010 State Employees UAAL
Teachers UAAL
State Employees Funding Ratio
Teachers Funding Ratio
$8,000,000,000 $7,000,000,000 $6,000,000,000 $5,000,000,000 $4,000,000,000 $3,000,000,000 $2,000,000,000 $1,000,000,000 $-
90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40%
Source: ERSRI 2010 Comprehensive Annual Financial Report28
Source: ANTHONY RANDAZZO, PENSION REFORM CASE STUDY: RHODE ISLAND 5 (2014) If that wasn’t bad enough, a few months after the revision, a working paper from
The Experience in Rhode Island: The Raimondo Plan (2011) Ø Introduced hybrid plan that reduced defined-‐benefit (DB) pensions while adding a defined-‐contribuHon (DC) component: • For DB plans: o COLAs applied only once every five years (unHl plan 80% funded), capped at 4%, and apply only to first $25,000 of pension income o Employee contribuHons reduced from about 9% to 3.75% of salary and employer contribuHons set at 1% of salary • For DC plans: o ContribuHons of 5% from employees and 1% from employers Ø Higher reHrement age linked to Social Security reHrement age
Exhibit S: State Employees Employees' Retirement System of Rhode Island - State Employees Defined Benefit Contributions Only Based on the June 30, 2010 Actuarial Valuation
The Experience in Rhode Island: Actuarial Predic&ons Current Provisions
1.a.
Unfunded actuarial accrued liability
1.b.
Change
2.a.
Funded ratio
2.b.
Change
3.a.
Normal cost percentage, current
3.b.
Change
4.a.
Normal cost percentage, longer term
4.b.
Change
5.a.
Contribution rate for FY 2013
5.b.
Change
6.a.
Projected FY 2013 payroll
6.b.
Projected contribution
6.c.
Change
$
Act Current Amortization Period
2,700.4 $
1,701.9 $ (998.5)
48.4%
11.39%
11.39%
25 Year Reamortization 1,701.9 (998.5)
59.8%
59.8%
11.40%
11.40%
9.36%
9.36%
-2.03%
-2.03%
6.18%
6.18%
-5.21%
-5.21%
FY2013 Contribution Information 36.34%
$
668.6 $ 243.0
25.36%
21.18%
-10.98%
-15.16%
668.6 $
668.6
169.6
141.6
(73.4)
(101.4)
$ in millions
Source: GABRIEL ROEDER SMITH & CO., ACTUARIAL ANALYSIS OF THE RHODE ISLAND RETIREMENT SECURITY ACT OF 2011 (2011).
The Experience in Rhode Island: Li&ga&on Ø In April 2014, Judge Sarah Tan-‐Carter generated headlines for denying a moHon to dismiss against the Governor and Treasurer Raimondo. Ø The judge held, reflecHng what is a decidedly minority posiHon naHonally, that RIRSA created a “unilateral, implied-‐in-‐fact contractual right” for state employees. Ø MediaHon was acempted unsuccessfully, and trial was set for Fall 2014.
The Experience in Utah: No Li&ga&on Ø Utah’s reform was precipitated by the 2008 stock market crash (fund had been completely solvent in 2007 and was underfunded by 30% in 2009, creaHng a long-‐ term $6.5 billion gap). Ø The Utah ConsHtuHon explicitly protected against amendments to pensions for current employees. Ø Utah’s reform package, shepherded by Sen. Dan Liljenqiust in 2010, offered new employees a choice between a tradiHonal 401K plan (with 10% employer contribuHons) or a hybrid plan similar to Rhode Island’s reform. • Minimum service term raised from 30 to 35 years • Limit on COLAs at 2.5% • Employer contribuHon capped at 10% of employee's salary – if the DB porHon of the hybrid fund is underfunded, employees must make up the difference
The Experience in New Jersey: PERS Reform (2011) Ø Governor ChrisHe signed into law a reform package for a majority of public employees that: • Raised employee contribuHon rates from 5.5% to 6.5% with an eventual increase to 7.5% over seven years; • Increased the reHrement age to 65; • Removed any COLA provision for current and future reHrees.
The Experience in New Jersey: 2014 Updates and Li&ga&on Ø As of early 2014 NJ’s system remained severely underfunded (approximately $40 billion). Ø Governor ChrisHe balanced FY 2014 budget by cuvng $887 million from state pension contribuHons. Ø Public unions then sued the state government under a theory very similar to the one recognized in Rhode Island. • Judge Mary Jacobson ruled that the 2011 reforms vested contractual rights in public employees and that any unilateral change created by the Governor’s pen has to be analyzed under consHtuHonal rules against contract impairment. • The exigency of the 2014 budget crisis led her to deny the unions’ request for an injuncHon because “the Governor’s acHons regarding FY 2014 appear[ed] to be reasonable and necessary to advance the State’s legiHmate purpose of preserving the economic and fiscal health of the State . . . .”
Forecas&ng Li&ga&on Outcomes in Connec&cut Ø Sovereign immunity bars suits against state governments for monetary relief without their consent, which means that ConnecHcut could decline to pay its annual contribuHons should the system become insolvent. Ø If the system remains solvent, ConnecHcut cannot face the problem by reducing pension benefits for already re4red workers (without their consent), since reHrees have a vested property interest in those benefits. Ø The state Supreme Court’s few rulings on the subject suggest state government enjoys significant leeway to alter pension benefits unilaterally for employees who have not yet reHred, although the court’s decisions include unresolved ambiguiHes on exactly how far this leeway extends. Increasing employee contribuHons, adjusHng COLAs, or adding a defined-‐ contribuHon component to pension plans would likely be allowed.
Property and Contract Claims Ø Property (Pineman decision) • State Employee ReHrement Act (SERA) “establishes a property interest on behalf of all state employees in the exisHng reHrement fund” and that interest “is enHtled to protecHon from arbitrary legislaHve acHon.” • individual employees obtain their property rights in the fund only “once they saHsfy the eligibility requirements of the act by becoming eligible to receive benefits” (which occurs at reHrement age). Ø Contract (Pineman & Poole decisions) • Pineman: SERA itself is not a contract; no word on collecHve bargaining pursuant to SERA. • Poole: Even when there is a contract, government has substanHal leeway under state and federal law to modify terms unilaterally during Hmes of fiscal crisis: “A municipality must ensure its fiscal integrity to provide not only benefits for past and future employees, but also necessary services to its residents.” • Poole holding / reasoning aligns with more recent decisions in New Jersey and many other states.
