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| Pensions: The Elephant in the Room |
In Connecticut the Governor and the
State legislature have failed to come up with a balanced budget despite the
constitutional requirement to do so by the end of June. Faced with this impasse
the Governor has sought wage and benefit concessions from the various public
service unions. If the unions will not agree, the Governor is threatening
draconian cuts in state services, as well as new tax increases.
Although the full details of the
“concessions” package have not yet been released to the public or the
legislature, it would appear that the unions are being asked to accept a kind
of hybrid pension plan for new employees as well as modest increases in member
contributions to the pension plan. In return for these and other concessions,
the Governor has offered a no-layoff pledge and an extended employment contract
that will effectively tie the hands of his successor for the next five years.
However, there are steps that the Governor
could have taken over the past seven years that would have reduced the pension
liability without violating any union contracts. There are many employees who
participate in the State’s defined benefit plan who do not belong to unions.
First, elected officials do not belong
to unions and do not have contractually binding pension benefits. The Governor
himself could have elected seven years ago to opt out of the pension plan and
contribute to a 401k type. A few years ago a mayor of Bridgeport chose to
participate in the State’s pension plan rather than the city of Bridgeport’s.
When he left office and returned to his former post in the Board of Education,
his mayoral salary dramatically increased his pension benefit.
Secondly, political appointees do not
belong to unions and have no contractual right to be in the State’s plan. They
could also contribute to 401k type plans. On taking office seven years ago the
Governor appointed a number of state legislators to six-figure posts in his
administration. As part-time legislators their salaries and potential pension
benefits were modest, but it only took three years in the Malloy administration
to triple their average pay for pension calculation purposes. These
appointments added millions to pension liability.
Third, judges do not belong to any
union and there is no contractual requirement for them to participate in the
State’s Pension plan. This is another area where the Governor has dramatically
increased Connecticut’s pension liability. One of the Governor’s first
appointments to the bench was Andrew MacDonald, a close Stamford friend and
long-time legislator. His appointment to the State’s highest court guaranteed
him a six-figure pension and not the modest pension that would have come to a
legislator earning about $35000 a year. MacDonald’s appointment was just the
first of many where Democrat politicians were given judgeships that would give
them six-figure pensions.
A couple of years ago Governor Malloy
nominated two Democrat lawyers to serve as judges at a starting salary of
$154000. Both men were 66 years of age and immediately became eligible for a
full pension of 66% of their pay when they retired at age 70. For serving just
four years they would have been eligible for a pension of about $100000. How
would it have been possible to fund such a pension? It would take $2.5 Million
dollars earning 4% to provide $100000 per year income.
The obvious unfairness of these
pensions led to a public outcry and the legislature quickly changed the pension
formula for new judges. Unfortunately, the change only applied to new judges.
The two lucky lawyers were grandfathered in. Their appointments added about $5
Million to the State’s pension liability.
Fourth, high salaried administrators
and doctors employed by the State University do not have union contracts. Their
existing vested defined benefit plan benefits could be frozen, and future
contributions could go into a 401k type plan. Doctors at the UCONN Medical
center have been the top pension recipients for years.
Finally, it would be easy for
legislators to remove themselves from the defined benefit plan. They all could
participate in a combination of Social Security and 401k plan just like the
ordinary citizens they are supposed to represent.
I am not suggesting that anyone lose
already vested benefits. I am just suggesting that existing benefits be frozen
or vested. For example, a legislator who has already served for 20 years would
still be eligible for a pension of 40% of his or her legislators pay. Benefits
for future service in any department of government would depend on the amount and
value of 401k contributions.
The State employs actuaries to
calculate the pension plan liability. It should be easy for them to calculate
how much the State’s liability would be reduced if the pensions of all
non-union government employees were frozen at current levels. I recommended such
a study to my state representative earlier this year but I doubt if anything
will come of it.
The Governor has asked union members
to make concessions; he has asked towns to assume part of the cost of the
growing pension liability; he has threatened significant cuts in education,
health and other necessary social services. Yet, in seven years he has never
suggested tweaking the pension benefits of high salaried political appointees,
judges, and UCONN administrators. Millions dedicated to fund pensions for
political fat cats cannot be used for the poor and needy.
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