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Connecticut would have to pay 35 percent of its tax revenue over 30 years in order to meet all its pension and retiree healthcare liabilities, according to a report by financial powerhouse JP Morgan.
In their ARC of the Covenants 2.0 report, which examines credit risk for municipal bond holders, JP Morgan listed Connecticut as one of four states including New Jersey, Illinois and Kentucky, as having the highest retirement liabilities.
The report measured the IPOD or the combined cost of interest on bonds, pensions, OPEB, and defined contribution payments, and calculated “the percentage of state revenues required to service all future obligations accrued to date.”
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In order to fully meet the state’s obligations to current and future retirees, Connecticut would have to raise taxes or cut spending by 14 percent or raise state employee contributions by 699 percent – or a smaller combination of all three.
The other option would be that Connecticut’s pension system receives a 13.6 percent return on investment over thirty years – something highly unlikely.
Connecticut assumes a discount rate of 6.99 percent, but returns from Connecticut’s pension system have amounted to only 5.14 percent over the past ten years.
The report also showed Connecticut had by far the highest OPEB liability in the nation at more than $200,000 per employee.
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But solutions to Connecticut’s pension and retirement benefits problems are not easily solved, and JP Morgan warned that tax increases or spending cuts might be difficult. “Tax increases might be politically difficult, particularly since some states with the highest IPOD ratios already have effective tax rates that rank among the highest in the US (IL, CT, KY, HI),” the report said.
Several attempts to raise Connecticut’s taxes were rebuffed during the budget debate this year. Proposals to balance the budget by raising the state sales tax or by raising taxes on the wealthy were dismissed.
Last minute tax proposals like adding a cell phone tax and a state property tax for second homes, which were included in the Democrats’ budget, were nixed when the House and Senate passed a Republican-authored budget which largely sidestepped tax increases by making pension and retirement benefit reforms in the future.
Gov. Dannel Malloy vetoed the bipartisan budget over concerns about the pension system and the legality of changing the way retirement benefits are set after the expiration of the SEBAC contract.
Although Malloy has paid the full cost of annually required contribution to the pension fund during his years in office, it has not been enough to stop the rising costs, which threaten to crowd out future spending and destabilize future budgets.
Over the past six years, Connecticut’s pension situation has actually worsened and its liabilities have grown an additional $8.6 billion.
The payments for pensions, retiree healthcare, and OPEB are part of the fixed costs that continue to grow at rapid rates, outpacing tax revenue.
However, making any reforms to the pension and retiree benefit system was delayed until 2027 as a result of the union concessions deal negotiated between Malloy and union leaders.
The agreement extended the SEBAC benefits contract and guaranteed employee layoff protections and raises in exchange for increased pension contributions and a three-year wage freeze.
The annually required contribution toward state employee pensions is expected to grow by $1 billion by 2027, following a restructuring of the debt by Malloy and the State Employee Retirement Commission.
Teacher pensions, however, could possibly grow six-fold to $6 billion by 2032, according to estimates by the Center for Retirement Research at Boston College. Gov. Malloy proposed that municipalities pay one-third the cost of those pensions as part of his budget, but that proposal was met with stiff resistance by the public and municipal organizations.
The Connecticut Council of Municipalities proposed creating a commission to study the problems with the state retirement and pension systems and find ways to make the sustainable.
A 2017 study, found Connecticut could reach a sustainable retirement system and save up to $9 billion over the next 30 years by making a number of reforms, including moving new hires onto 401(k) style defined contribution plans, limiting the amount of overtime included in pension calculations and increasing employee contributions.