What’s next for CT’s unfunded pensions, since the legislature did nothing


What’s next for CT’s unfunded pensions, since the legislature did nothing

Connecticut’s unfunded pensions for state employees – about $127 billion in debt borne by today’s taxpayers – are much talked about.

As the legislative session ended, once again, nothing was done to stem the continuing losses and increasing debt payments.  Those who blocked reform may think they won, but the victory is truly Pyrrhic.

Likely consequences?

If taxes are raised again, expect to see more and more people moving out of the state.

Connecticut is now one of eight states where the total population is going down.  This already means fewer people paying Connecticut taxes.   Following the 2015 tax increases, more citizens fled the state – the largest group was high-income earners.   Expect the effective state tax increase resulting from Federal tax reform to cause even more high-income earners to leave Connecticut in the near future.

The most feasible plan to save  state employee pensions and restore fiscal health begins by converting financially vulnerable defined benefit pension plans into defined contribution pension plans, and by structuring lump-sum buy-outs of employees in existing pension plans.

Defined contribution plans give employees more choices and more control over their retirement accounts.  Individuals would be in a better position to monitor their retirement accounts, and politicians wouldn’t be able to raid retirement accounts as has happened with Connecticut’s government-managed plans for state employees and teachers.

This fundamental reform must be coupled with a restructuring of pensionable compensation and implementation of the constitutional spending cap passed in 1991 but never fully implemented.

These reforms would set the stage for issuing bonds that will enable to state to retire the pension debt on substantially more favorable terms – including lower interest rates. This means more certainty for everyone – taxpayers, pension beneficiaries and investors who might agree to buy the new bonds.

A big question is whether the bond market will have an appetite for these Connecticut bonds.   We’ll know only when the bonds are actually offered.

Several things are clear – higher taxes driving more people from the state; reduced tax revenue and ability to pay, will work against new Connecticut bond issues and against a true victory for taxpayers and pension beneficiaries

The longer this financial crisis continues, and the more news stories are published about it, the more investors are likely to worry about losing money in Connecticut bonds.

The time for action is now.

Dramatic financial reforms – difficult though they may be – are ultimately Connecticut’s only path forward.

Fundamental structural change is needed to restore affordability of government services, protect pension beneficiaries, regain taxpayer confidence, stem the tide of Connecticut emigres, and restore growth to this state.


Article originally published by CTViewpoints

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