Connecticut has poured billions of surplus dollars into its pension funds and scored big investment returns in recent years, but a new analysis from The Pew Charitable Trusts shows the cost of pension benefits here remains higher than in most other states.
And the main beneficiaries of Connecticut’s big spending on pensions, however, are not present-day state employees and municipal teachers. Rather, the bulk of that involves making up for billions of dollars in contributions and investment earnings that state officials failed to secure across seven decades prior to 2011.
Connecticut’s spending on pensions in the 2021-22 fiscal year represented 51.5% of payroll, which was fourth-highest rate in the nation, topped only by Illinois at 54.3%; Kentucky at 56.3%; and Alaska at 59.1%, according to the report from Pew, an independent, nonprofit think-tank.
All other states ranged between 6.1% and 34.8%.
“This report is a sobering reminder of the hole Connecticut is climbing out of after decades of inadequate commitment to managing pension debt and meeting retiree obligations,” Connecticut state Treasurer Erick Russell said. “Fortunately, in the two fiscal years since this data, our pension funds have generated strong returns and added billions in assets.”
Russell announced last week that Connecticut had made an 11.5% return in 2023-24 investing its pension assets, placing it in the top 25% nationally of large public pension funds. Connecticut also ran up strong returns in 2022-23, having made 8.5% on investments in 2022-23.
Russell has adjusted the state’s portfolio considerably since he took office in January 2023 to reverse more than a decade of poor investment returns. Russell has reduced investments in emerging ventures, put more funds into private and domestic markets, and curbed reliance on investment managers who receive fees for their work, embracing recommendations made by Yale researchers in May 2023.
The new treasurer’s efforts have complimented a push by Lamont and the General Assembly to bolster Connecticut’s efforts through aggressive savings efforts.
Between 2020 and 2022, about $5.8 billion in surpluses were used to pay down unfunded pension obligations. Another $1.9 billion went toward the pensions in 2022-23.
And of the $1.6 billion estimated surplus from the 2023-24 fiscal year, which closed June 30 but won’t be audited and certified until later this month, about $790 million will be added to the emergency budget reserve and roughly $850 million will bolster pensions, according to the Lamont administration.
Despite that sustained effort, though, Connecticut entered this calendar year with more than $37 billion in unfunded pension obligations, a problem created by more than 70 years of improper savings by governors and legislatures between 1939 and 2010.
Connecticut entered this fiscal year with enough assets to cover about 52% of the long-term obligations of its pension fund for state employees, and nearly 60% in the teachers’ system, according to valuations by fund actuaries.
Required contributions to the two main pension funds collectively top $3.2 billion this fiscal year and eat up 14% of the entire General Fund. Analysts project required contributions will continue to place heavy pressure on state finances into the 2040s.
But the bulk of those required payments this fiscal year — and for many to come — will go primarily toward filling the funding gap created by past generations.
For example, 87% of the more than $1.6 billion owed this fiscal year to the state employees’ pension fund is the penalty for covering past debt, with just 13% representing savings to cover the eventual retirements of present-day employees.
“We cannot take our eye off the ball,” Russell added. “The only way through the legacy of debt we’ve inherited is by making required payments, securing strong risk-adjusted returns, responsibly managing state finances, and strategically investing in our communities to grow our economy and uplift residents.”
This story was originally published by the Connecticut Mirror.