“Over many decades, legacy costs, insufficient contributions, lower-than-assumed returns, and early retirement packages left us with a significant unfunded liability,” said Connecticut Gov. Dannel Malloy.

Connecticut must enact pension system overhaul that balances fiscal responsibility and retirees' needs, Gov. Dannel Malloy said Wednesday.

"Over many decades, legacy costs, insufficient contributions, lower-than-assumed returns, and early retirement packages left us with a significant unfunded liability in the state's employee and teacher retirement systems," Malloy said in his State of the State address on the opening day of the legislative session at the state capitol in Hartford.

Malloy urged lawmakers to approve an agreement he struck last month with the State Employees Bargaining Agent Coalition that extends an amortization period for unfunded liability to 2046 from 2032. It also transitions from level percent of payroll to level dollar amortization over five years.

Moody's Investors Service called the deal a credit positive, a rare uptick in the capital markets for Connecticut of late.

Bond rating agencies cited dwindling reserves and budget imbalances in three general obligation downgrades last year. S&P, Fitch Ratings and Kroll Bond Rating Agency assign AA-minus ratings while Moody's assigns an equivalent Aa3 rating.

S&P lowered its outlook to negative from stable. Moody's has a negative outlook while Fitch and Kroll have stable outlooks.

Malloy intends to release his biennial budget on Feb. 7, with more particulars on pension overhaul, agency cost-cutting and educational aid to cities and towns.

Connecticut is on track to end fiscal 2017 with a $56.2 million deficit, state Comptroller Kevin Lembo said Tuesday. That deficit could reach $1.3 billion by fiscal 2018, which begins July 1.

Lembo said his deficit projection still slightly exceeds that of Gov. Dannel Malloy's Office of Management and Budget due to a variance in estimated claims related to the settlement of a federal lawsuit by unions over then-Gov. John Rowland's layoff of more than 2,000 workers in 2010.

Malloy also urged department heads to continue scrutinizing their budgets for possible further cuts. "We can no longer afford to do it all," he said.

He also asked lawmakers to explore more equitable educational aid to cities and towns. Such assistance, he said, consumes more than one-fifth of the state budget – more than pensions, Medicaid or debt service.

Connecticut is appealing a state Superior Court ruling that ordered it to rework its aid-distribution formula to better serve students in low-income communities. Judge Thomas Moukawsher, in the 11-year-old case Connecticut Coalition for Justice in Education Funding v. Rell, essentially called the state educational system's underpinning unconstitutional.

"We need a formula that appropriately measures a given community's burden," said Malloy. "A formula that recognizes specific challenges faced by local property taxpayers. And a formula that takes into account the impact those challenges have on the education provided to our children."

In a comment aimed at capital city Hartford, Malloy said state aid to teetering municipalities "shouldn't come without strings attached." A more active state role, he said, would include holding local officials to higher standards.

"We should do it so that increased aid doesn't simply mean more spending on local government."

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