State Retirement Commission blocks towns from real pension reform

Welcome to the Connecticut Municipal Employee Retirement System (CMERS), a state-run pension plan for local public employees that’s a little like the Hotel California: Once you’re in, good luck getting out.

Take the case of Hamden. Hamden had one of the worst funded pension plans in the country. The pension was only 10 percent funded and owed $400 million toward the fund.

In an effort to reduce future liability, starting in 2007, Hamden moved all new police and fire hires to the CMERS plan, and finally their civilian hires in 2009. This closed the old pension plan to new hires.

This improved their net pension fund’s outlook, but former Mayor Scott Jackson – who now works for the state Department of Labor – wanted to go a step further to save the town money by moving new hires into a defined contribution, 401(k)-style plan, and he secured agreement from the union representing town employees.

But Jackson learned that CMERS doesn’t allow you to opt out. Despite agreement by both Hamden officials and unions, they were unable to move new hires to a defined contribution plan because state statute doesn’t allow it.

CMERS does not allow for only part of a town’s workforce to be enrolled. It is an “all-in or all-out” scenario. So the town cannot make a new retirement plan for new employees unless they withdraw all employees from CMERS and cover the full liability costs for all employees.

As a result, the state statute stands between the town of Hamden and the retirement benefits reform they not only want, but need.

Actuaries say this law is necessary because if towns were able to opt out for new employees it would raise the contribution costs for all participating municipalities. Regardless, the contribution costs are growing anyway. Scott testified before the Labor and Public Employees Committee that Hamden’s contribution was expected to grow from $1 million per year to $20 million by 2040.

Meanwhile, the town’s yearly payments to CMERS are projected to grow dramatically over the next thirty years.

Hamden’s attempted shift is part of a much larger trend of reforming retirement benefits within the public sector. Towns in Connecticut are coming to accept that projecting future pension costs is difficult and taxpayers suffer when the assumptions are incorrect.

And this is true as well for other towns that belong to CMERS. Despite the rising cost, they cannot leave the program unless they follow the state’s strict constraints. Half of Connecticut towns are shackled by this rule.

In 2015, the Labor and Public Employees Committee raised a bill that would change this, H.B. 6931. The bill would have allowed towns like Hamden to switch new hires over to a defined contribution program.

As Jackson wrote in his testimony to the committee, “The cost of the defined contribution plan would be less than the cost of placing new employees in CMERS and provide the parties with more flexibility at the bargaining table. … This approach also benefits the state of Connecticut, as ultimately CMERS would be responsible for making pension payments to a smaller number of municipal employees.”

Unfortunately, the bill went nowhere.

CMERS has underperformed in recent years. Since 2009, CMERS has accrued $300 million in unfunded liability, dropping from a 103 percent to an 85 percent funded ratio. The primary reason for this gap is that assets failed to grow as quickly as expected. This highlights the main problem with defined benefit plans – even the best operated pension plans can experience difficulty or even fail because they are based on assumptions that may or may not be correct.

This state restriction on towns in CMERS forming new plans for their new employees stands in the way of reforms that would make retirement benefits for municipal employees safer and more sustainable – and it should be repealed.

This is a common sense reform – if your town’s elected officials and unions come to an agreement on sustainable retirement reform, they should be able to enact it. The state shouldn’t intervene in local finances to block fiscal responsibility.

This article was amended to clarify that towns are not able to opt out for new employees only due to state statute.