Additional retirement payments mean savings now – and later

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Controller Kevin P. Lembo

While Connecticut wrote off $ 1.25 billion of its massive long-term retirement debt this month, it still has decades to cover the rest – nearly $ 40 billion.

But the only advantage will be felt right away. The additional payment frees up $ 110 million that Connecticut can now spend each year on something other than its oppressive retirement obligations, according to a new analysis.

“This is a real relief that will both save future generations a legacy of retirement debt and give taxpayers short-term budget relief,” Comptroller Kevin P. Lembo said, citing new projections for Cavanaugh Macdonald Consulting of Kennesaw, Ga., State Employee Retirement System, Fund Actuaries.

Lembo lobbied lawmakers for several years starting in 2017 to increase savings on the huge debts Connecticut has racked up for more than 70 years in its separate pension systems for state employees and for municipal teachers. .

Lawmakers responded in 2017 by creating the “volatility adjustment,” which prohibits the state from spending part of its tax revenues related to capital gains and other investment income – a source that often fluctuates dramatically from year to year.

The stock markets have generally performed well since 2018, resulting in big savings.

Since then, Connecticut has raised a rainy day fund that has reached its legal maximum at 15% of annual General Fund expenditures, or just over $ 3 billion.

Any surplus beyond this level must, according to the system adopted in 2017, be deposited in one or the other of the two large pension funds.

Connecticut entered the 2020-21 fiscal year – which ended June 30 – with nearly $ 41 billion in total retirement debt.

The fiscal year just ended includes over $ 2.6 billion in the required payments in both pensions. However, a large chunk of those dollars will go towards benefits for retirees rather than debt reduction.

But for the remaining $ 1.25 billion from the fiscal year just ended – most of that surplus comes from the volatility adjustment – it will all go to reducing pension debt.

New projections from Cavanaugh Macdonald predict that this $ 1.25 billion – which state treasurer Shawn Wooden deposited in the state employees’ pension fund – will add $ 2.75 billion in value to that. system over the next 25 years. [The pensions’ assets are invested in stocks, bonds and other securities and add value that way.]

That translates to $ 110 million in added value per year, according to the analysis.

“It was a big and difficult change, but now we see the reward of coming together to do difficult things,” Lembo said. “There is a lesson to be learned from this. “

“Now it remains our job as Heads of State to stay the course and pave the way for a sustainable economic recovery that reaches everyone in our state, especially those who continue to suffer as we recover. effects of the pandemic, ”Wooden said.

State officials and private political groups have long noted the annual payments on these bonds have gradually consumed resources previously allocated to education, health care, municipal aid, transport and other priorities.

About 40% of the state budget in 1992 – the first fiscal year after the state income tax came into effect – was spent on education, health care and other programs affecting children, according to Connecticut Voices for Children, a New Haven-based research and public policy group. Now the ratio is now closer to 30%.

Senator Cathy Osten, D-Sprague, who co-chairs the Appropriations Committee, recently said lawmakers hope they can shift more than $ 110 million a year in future budgets from pension debt to other programs.

For example, if the new $ 46.4 billion budget that Governor Ned Lamont and the General Assembly passed for the next two fiscal years goes as planned by non-partisan analysts, Connecticut could be on the verge of paying. An additional $ 2.3 billion in additional pension fund payments by mid-2023. .

The impact of these potential contributions has not yet been calculated. But Osten estimated that this could create between $ 100 million and $ 200 million in additional annual savings on pension contributions, depending on how the stock markets move over the next two years.

About Christian M.

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