Connecticut’s efforts to reform public pensions may add long-term costs for taxpayers

Connecticut House Bill 6930, recently signed by Gov. Ned Lamont as Public Act 23-182, makes numerous changes to the state’s municipal employees’ pension system. While the bill aims to address immediate financial concerns the state and local governments are facing related to the growth in required payments to the Connecticut Municipal Employees Retirement System, (CMERS), the law also carries long-term financial consequences that should be considered. 

One of the most significant aspects of this bill is the extension of the plan’s debt amortization schedule from 17 years to 25 years. While this change may provide short-term cost relief by reducing immediate annual contributions, it comes at a substantial long-term cost to taxpayers. Extending the schedule means that future taxpayers will end up paying millions more in interest payments over the life of the public pension obligations. 

Unfunded pension liabilities are debt, after all, and the unfunded liabilities also grow at CMERS’ discount rate of 7% each year. This is a concerning trade-off, as the proposed near-term cost relief could easily be wiped out by a year or two of poor investment returns. Compounded with the overall increase in dollars needed to pay off today’s debt, it could pressure public officials to pass on even more debt into the future. 

It’s important to note that extending the amortization period contradicts the recommendations that major pension actuarial groups like the Society of Actuaries have put forth since the early 2010s. These recommendations have consistently advised that public pension systems should pay off unfunded liabilities within 15 to 20 years. This shorter timeline helps reduce the overall financial burden on future generations of taxpayers. 

The bill also changes the cost-of-living adjustments (COLAs), which are a mixed bag of savings and costs. House Bill 6930 increases the COLA cap, which may raise costs for the pension system in the short term in the current high-inflation environment. 

However, the removal of the COLA minimum and the postponement of the date when retirees can begin collecting their cost-of-living adjustment—requiring a 12-month break in service before COLAs may be granted—have the potential to yield cost reductions in the future. Balancing these factors and considering the long-term impact of cost-of-living adjustments is crucial for a sustainable public pension system.

Additionally, the Connecticut bill introduces a deferred retirement option program (DROP) for employees. In a DROP, employees may receive pension payments while still earning a salary, which can financially burden the system. A DROP also incentivizes public employees to apply for retirement as soon as possible so they may enter the DROP system and begin accumulating their lump-sum payouts. For a plan with such a low average retirement age (55) and such lax policies around early retirement, this program could do the opposite of what the bill intends by incentivizing early retirement rather than incentivizing employee retention.

Historically, the implementation of DROP programs in pension systems has consistently led to increased costs and placed strains on cash flow, as detailed by Reason Foundation here, the Government Finance Officers Association here, and the Los Angeles Times here. 

“When looking into public pension plans that offer a DROP, a clear trend emerges: poorly funded plans and a swamp of unfunded liabilities.” — Pension Integrity Project at Reason Foundation

“GFOA recommends that government defined benefit plans do not include DROPs for the following reasons: 1. The cost impact of a DROP is difficult to assess; 2. DROPs may conflict with goals of pension design; 3. Employee choice frequently increases employer cost; 4. Specific DROP characteristics and features often add additional cost.” —Government Finance Officers Association

“Supporters of the program suffered another blow last month when a city report showed DROP has never been’ cost-neutral’ as was promised to voters in 2001.” — Los Angeles Times

One silver lining surrounding the discourse of this reform came from State Comptroller Sean Scanlon, who correctly identified the culprit behind the underfunded CMERS system and the need for further reform. Scanlon said:  

“Because decades of Democrats and Republicans messed this up and weren’t paying down this debt to begin with, we now are in a situation that if we didn’t do that, the bubble would be bursting on us and towns that are already maxed out and don’t have the ability to raise any more property taxes from the residents. We’re having to make these terrible decisions. 

We had some communities that were saying ‘we’re gonna hire or fire police officers or firefighters or teachers, depending on what you do.’ I don’t think it’s good for any Connecticut community in this state to be firing police officers, firefighters or teachers…They messed us up by not paying anything for 80 years.

And we’re going to continue to progress …and then next year, in the next legislative session, the goal is, we will bring additional reforms to this fund.”

In conclusion, Connecticut House Bill 6930 runs into major concerns when attempting to balance the immediate financial needs of CMERS employers with the financial solvency of the pension system. While certain provisions in the law may offer short-term relief, such relief may be undermined by the long-term consequences, particularly the extended amortization schedule and the introduction of a DROP program.