Connecticut's State Employees Retirement Commission has unanimously voted to lower the assumed rate of return for the State Employee Retirement System to from 8% to 6.9%.
Thursday's vote followed by one week the agreement between Gov. Dannel Malloy and the State Employees Bargaining Agent Coalition that extended a amortization period for unfunded liability to 2046 from 2032.
It also transitions from level percent of payroll to level dollar amortization over five years. The prior funding system used a level percent of payroll calculation that back-weighted repayment of the debt, resulting in payments in the years approaching 2032 that would have grown sharply.
"The lowering of the rate will put Connecticut in line with other states and private sector plans, and will strengthen confidence in the state's ability to resolve the unfunded liability," Malloy said in a statement.
Moody's Investors Service on Thursday called the restructuring a credit positive. "The agreement sacrificed the goal of a shorter period to amortize," said Moody's, which likened the move to a debt refunding that saves money up front by back-ending the payments.
"When viewed in isolation, these types of actions are credit negative," said Moody's. "However, extending the amortization schedule allows the state to make other aspects of its funding approach more conservative."
Connecticut has struggled to balance its budget.
Speaking last month to a joint legislative panel, budget director Benjamin Barnes said fixed costs have risen from 37% of general fund revenue in fiscal 2006 to a projected 53% in fiscal 2018, which will start on July 1.
S&P Global Ratings on Nov. 30 lowered its outlook for Connecticut general obligation bonds to negative while affirming its AA-minus rating. Bond rating agencies have hit Connecticut with three GO downgrades this year.
S&P, Fitch Ratings and Kroll Bond Rating Agency assign AA-minus ratings while Moody's Investors Service assigns an equivalent Aa3 rating. Moody's has a negative outlook while Fitch and Kroll have stable outlooks.
Barnes said Thursday that the "unnecessarily optimistic" 8% assumed rate of return was creating a spike in the unfunded liability – as much as $4.2 billion from 2001 to 2014.
"This change puts us on a much better path," he said.
State Treasurer Denise Nappier, while praising the agreement, said the extension of the time periods for funding the remaining liability, as well as new gains and losses, deserves more scrutiny.
"While I support reasonable phase-ins of gains and losses to temper the impact on the state's yearly pension costs, the use of 25-year phase-ins should be very limited," she said. "For example, significant investment losses due to severe downturns in the market, such as what we witnessed in 2008, would be an acceptable phase-in experience.
"We should not, however, allow benefit enhancements, such as early retirement incentive programs, to be phased in and paid for over such a long time horizon."