BOSTON -- Connecticut's recently passed state budget “may erode carefully constructed progress toward funding sufficiency" of the Teachers' Retirement Fund, said state Treasurer Denise Nappier.
At a special conference call meeting of the Teachers’ Retirement Board on Wednesday, Nappier voted against the approval of a revised June 30, 2016 actuarial valuation prepared by Cavanaugh Macdonald Consulting LLC in response to the budget the General Assembly passed in October.
Gov. Dannel Malloy on Oct. 31, after a four-month budget stalemate, signed a $41.3 billion biennial spending plan.
That budget, said Nappier, increases retirement contributions from teachers by 1 percentage point -- from 6% to 7% of their pay -- and reduces the state’s contribution by $59.5 million from the amount that otherwise would have been paid into the Teachers' Retirement Fund -- one of the state's two largest pension funds -- for 2018 and 2019.
“Nearly a decade ago, I worked with our teachers to establish a disciplined path toward full funding of the Teachers’ Retirement Fund," said Nappier. "This latest action by the legislature tugs at the threads of our efforts, and I strongly advise that there be careful scrutiny of any steps that would undermine the framework necessary to reach our goal."
According to the Cavanaugh Macdonald analysis, the new state budget will result in a further increase in the unfunded actuarial liability of the TRF of $20.4 million and a decrease in the funded ratio from 56.01% to 55.97%.
“While the drop in the funded ratio and the increase in unfunded liability attributable to the budget may not seem like much, it is a slippery slope,” Nappier said.
“Any increase in the unfunded liability, however small, is a step in the wrong direction," she said. "The changes may meet the letter of the law regarding the bond covenant adopted in 2008 to shore up the Fund, but they certainly violate the spirit.”
Unfunded pension and other post-employment benefit package liability is a national concern. According to a recent report card by the Volcker Alliance, 19 of the 50 states received grades of D or D-minus in the legacy costs category. It estimated the nationwide tab at $2 trillion, separate from rapidly rising Medicaid expenditures and slow revenue growth.
Connecticut received a D grade in managing legacy costs from the alliance, which said state leaders did not follow best practices in public employee OPEB funding.
The state's pension funds performed in the top 10 nationally for fiscal 2017, Nappier said last week.
The portfolio value of the Connecticut Retirement Plans and Trust Funds rose by more than $3 billion during fiscal 2017, while net market value for the TRF and the State Employees’ Retirement Fund spiked by $1.5 billion and $1.3 billion, respectively.
The TRF, with a net investment return of 14.38% for the fiscal year, would have tied for eighth place had it been ranked separately, said Nappier. In addition, it would have been one of just five teachers’ pension plans nationally to earn a return above 14%.
The fund, she said, significantly outperformed both its benchmark by 114 basis points and its 8% assumed rate of return.