Comptroller Natalie Braswell released an analysis on Thursday that shows budgetary and financial reforms in recent years are now projected to save taxpayers an estimated $11.5 billion by eliminating pension debt.
The analysis was performed by the independent actuarial firm Cavanaugh Macdonald at the request of the comptroller’s office. It shows that additional contributions to the State Employees Retirement System (SERS) and the Teachers’ Retirement System (TRS) in each of the prior two fiscal years, and additional funds that will be deposited after the close of Fiscal Year 2022, will generate significant reductions in each fund’s outstanding liability. The result will be lower annual required payments to the pension funds and lower overall debt, benefiting taxpayers now and in the future.
“The painstaking work of getting Connecticut’s fiscal house in order continues to pay off for taxpayers,” said Comptroller Braswell. “As economic volatility impacts all aspects of everyday life, the state’s budgetary situation is increasingly stable and still improving, in stark contrast to the years of sacrifice and chaos following the Great Recession. The reforms that have filled the Rainy Day Fund with a current balance of more than $3.1 billion, and helped pay down pension debt, will also free up resources that can be used to help working families, protect critical services and guard against national economic turmoil.”
“By prioritizing paying down the state’s pension debt, we’re removing an economic anchor that threatened to hold back Connecticut’s long-term growth,” said Governor Ned Lamont. “We’re now seeing jobs return across the state and earning a national reputation for our fiscal responsibility. As a result, the working people of Connecticut will not have to endure a repeat of the years of budgetary warfare in the Capitol that led to tax increases and cuts to critical services. This also provides immediate savings that can be invested in our communities and bring relief to taxpayers.”
According to a state law originally proposed by former Comptroller Kevin Lembo, excess revenues in particularly volatile categories are automatically deposited into the state’s Budget Reserve Fund (commonly referred to as the “Rainy Day Fund”). That fund has currently reached its statutory cap, triggering a provision that directs the remainder of the volatility transfers be used to pay down debt, including in the pension funds. Any budget surplus certified at the close of the fiscal year also gets deposited following the same process.
That policy, and accompanying reforms including raising the maximum cap on the Budget Reserve Fund, have resulted in additional payments into the pension funds of:
- $61.6 million in Fiscal Year 2020;
- $1.6 billion in Fiscal Year 2021;
- and a projected $3.7 billion in Fiscal Year 2022.
The actuarial analysis shows that those contributions, and their corresponding investment returns, are projected to reduce future required payments to the pension funds by hundreds of millions of dollars each year until the current debt schedule is completed in 2048.
In the 1990s, state government transitioned to a model of pension funding akin to a balloon mortgage, where required contributions started small but increased in later years. The state often failed to make even the more modest contributions and debt accumulated as a result. The economic fallout from the Great Recession exasperated the problem, particularly as the pension funds failed to meet their goals for investment returns and the Budget Reserve Fund was drained to cover budget deficits. As recently as 2015, analysts warned that without intervention, lawmakers could need to spend as much as $13 billion per year by 2032 to satisfy minimum pension funding requirement.
A restructuring of existing pension debt, known as re-amortization, in 2017 set the table for consistent and predictable required payments that would retire the existing debt by 2048. The additional contributions made in recent years will now bring down those annual costs, freeing up over $440 million per year as soon as Fiscal Year 2024 that can be used to fund other government services, invest in infrastructure projects or reduce taxes.
Earlier this month, Braswell also announced a new contract award for the state health plan’s Medicare Advantage program that will save an additional $400 million over the next three years and reduce the state’s Other Post-Employment Benefits (OPEB) liability by approximately $7.5 billion.
This continued effort to reduce long-term debt has been acknowledged by ratings agencies, including Standard & Poor’s (S&P) which elevated the state’s general obligation bond outlook from “stable” to “positive” in May. In a report to investors, they wrote in part, “we believe Connecticut has recently demonstrated a commitment to restoring budget reserves during periods of economic and revenue growth that could insulate its finances from recessionary headwinds.”Download release and report as PDF More News