How governor's plan could trigger technical default on Connecticut pension bonds

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HARTFORD, Conn. -- Connecticut Gov. Dannel Malloy and state Treasurer Denise Nappier continue to spar over how to cover teachers' pension fund liabilities.

Speaking to lawmakers at the state capitol's legislative office building on Friday, Nappier said Malloy's plan to push out state payments to the Teachers' Retirement System would violate a covenant from a 2008 bond issuance.

"I urge you to reject it," Nappier told members of the General Assembly's joint budget-writing appropriations committee. Such a move, she said, would result "in a technical default that will require disclosure in our bond offering documents, and potentially reduce market interest in our bonds."

In 2008, the state issued $2 billion of pension bonds, which Nappier recommended at the time. The legislature and then-Gov. Jodi Rell, a Republican, approved it. The state's bond counsel, Day Pitney LLP in Hartford, advised two years ago that any deferral of related payments into the teachers fund would violate guarantees under the covenant.

Malloy's proposed smoothing would mean higher borrowing costs into the future, said Nappier. "Of equal importance, the governor’s plan would essentially eviscerate the bond covenant as an enforceable commitment to ensure funding discipline."

Connecticut already faces skeptical investors and rating analysts. Budget imbalance and high debt and pension liabilities have prompted multiple downgrades from the four bond rating agencies the past two years.

Malloy has asked the legislature to push out contributions toward the teachers fund akin to changes it made last year to Connecticut's other major pension fund, the State Employees' Retirement Fund.

"Connecticut simply cannot afford annual payments of $4 to $6 billion into this fund," the governor said in December.

Neither Malloy nor Nappier, both Democrats, are seeking re-election.

A 2015 report to Malloy by the Center for Retirement Research at Boston College said the required annual contributions to the employees and teachers pension funds would spike sharply by 2032, because of back-loaded amortization.

"If all actuarial assumptions are met, and the systems achieve their assumed returns, total costs for the two systems will rise steadily from $2 billion in 2014 to nearly $5 billion by 2032," the center reported.

According to an analysis by Cavanaugh Macdonald Consulting LLC, the new state budget would result in a further $20.4 million increase in the unfunded actuarial liability of the Teachers' Retirement Fund and a decrease in the funded ratio to 55.97% from 56.01%.

Pew Charitable Trusts considers 80% an acceptable threshold.

Moody's Investors Service rates Connecticut's general obligation bonds A1. S&P Global Ratings and Fitch Ratings assign A-plus ratings, while Kroll Bond Rating Agency rates the GOs AA-minus.

Last year's biennial budget for fiscal 2018 and 2019 was four months late. Lawmakers are weighing mid-cycle adjustments to last year's approved $41.3 billion spending plan.

"Needs for increased revenue and maintaining balance against high taxation concern is an ongoing challenge," said Ajay Thomas, executive vice president and head of public finance at FTN Financial. "During last year’s budget discussion, it was telling that there appeared to be a consensus that the state’s wealthy population was reaching a ceiling for taxation without potential damage for further population and business flight, which is certainly counterproductive."

Connecticut received a D in managing legacy costs from the Volcker Alliance in its annual report card on the states. The alliance said state leaders did not follow best practices in other post-employment benefits funding.

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Public pensions Pension reform Pension obligation bond Bond defaults Denise Nappier Dannel Malloy State of Connecticut Connecticut