Unfunded State Pension Liabilities

States all over the country are grappling with ever increasing unfunded pension liabilities. My home state of Connecticut trails such pension liability behemoths like Illinois and New Jersey but still ranks high on the danger list. In June 2010 the Connecticut public pension fund had $9.3 Billion in assets but its actuaries calculated that the State still needed an additional $21.1 Billion to meet all its pension obligations. It was only 44% funded.

By June 2016, six years later, State pension assets grew to $11.9 Billion, a 28% increase, largely because of the increase in the stock market. Nevertheless, despite Governor Malloy’s tax increases and commitment to funding pensions, the pension liability had grown to $32.3 Billion, a whopping 53% increase. After six years under Governor Malloy, the pension system was only 37% funded. What caused the increase? 

The Governor, who will not seek re-election this year after serving two terms, has placed the blame for rising pension liabilities on his predecessors in office, as well as on the Legislature which has been controlled by fellow Democrats throughout his tenure. His complaint is a common one. If only previous politicians had had the guts to face up to reality and popular pressure, pension liabilities would be manageable. Instead, politicians just pushed the day of reckoning down the road.  

There is a degree of truth in Malloy’s assessment but actually there was no way that any of these state public pension plans could ever have been adequately or fully funded. They are “defined benefit” plans that require actuaries to determine the potential costs of benefits that are promised to future beneficiaries. A key factor in the calculations will be the “assumed rate of return” on both assets in the plan. 

Despite the increase in Connecticut pension assets during Governor Malloy’s tenure, the pension liability has grown largely because of the low interest rate environment during those years. If the expected rate of return is reduced, actuaries must indicate that pension liability is growing. A drop of even one percentage point in the assumed rate of return will add millions to pension liability.

Politicians have no control over interest rates. Lack of control is one of the reasons why most business corporations dropped their defined benefit pension plans over the past few decades. A business could be thriving but its pension actuary could kill its balance sheet by claiming that it had to put billions more into the pension plan because of a decline in expected rate of return due to circumstances entirely beyond control. In a defined contribution or 401k type plan, a corporation’s contribution is a manageable percentage of payroll.

The very definition of the benefit in a defined benefit pension plan presents another problem for actuaries trying to assess pension funding. The retirement benefit is usually a percentage of an employee’s final average pay over the highest three years of service. How is it possible to calculate pension liability when salaries can change dramatically especially during the last years of employment? For example, during his tenure Governor Malloy has appointed a number of Democrat legislators to high paying positions in his administration or on the judicial bench. 

While those politicians served in the legislature, actuaries would determine their pension liability as a percentage of their $35000 part-time salary. But they need to serve only three years in their new positions to throw all pension calculations out the window. Instead of getting 60% or 70% of $35000, the actuaries will have to figure that they will receive the same percentage of some six figure salary. During his tenure the governor raised his long-time Stamford Democrat friend Andrew McDonald to a judgeship on the State Supreme Court. McDonald’s minimal contributions to the pension fund during his eight years in the legislature will come nowhere near providing a six-figure pension.

These political appointments are the tip of the iceberg. How is it possible to calculate the future pension liability for young teachers just starting their careers when no one knows what their final average pay will be? Step raises due to longevity, minimal cost of living increases, and future inflation will practically quadruple their salaries after 35 years of service. 

Businesses changed their pension plans years ago because they lived in a very competitive environment, and they could not count on taxpayers to bail them out. States and municipalities were not in the same situation. Not only did public entities not worry about profits and losses, politicians had little incentive to strike hard bargains with public service unions. In business, management and labor sit across the negotiating table from one another. In government, the politicians negotiating with the unions are usually on the same side of the table. Not only do governors and legislators rely heavily on union votes and campaign contributions, but also they, their families, and friends often gain from benefits they grant to union members. 

Why didn’t Governor Malloy change the pension system for non-union employees in his administration or in the state court system? They have no binding union contracts. In the last eight years he and the Democrat controlled legislature could have put them into a 401k type plan with the stroke of a pen. Alternatively, he could have easily changed the definition in the benefit formula for these non-union employees. Instead of basing their pension on the average of their highest three years of service, the Governor could have used the average of all the years of their public service. 

Public service employees make up a small percentage of the population of Connecticut but a larger and larger share of the State’s budget is going to fund their generous pensions. The rest of Connecticut's population is covered under Social Security where  the retirement benefit is based not on the highest three years pay but on average pay over practically an entire working career.

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Connecticut Governor's Race

 

Republican Bob Stefanowsk 

It looks like Republican Bob Stefanowski is not doing well in his quest to become Governor of Connecticut. After eight years of the disastrous administration of Democrat Governor Dannell Malloy, 2018 looked like the year when Republicans could not only win the Governorship, but also gain at least one of the legislative houses.

But Stefanowski’s campaign seems to be following the same path that led other millionaire candidates like Linda McMahon and Tom Foley to flop on election day. Each of them lost close elections because they could not overcome massive Democrat majorities in cities like Bridgeport, Hartford, and New Haven.

Stefanowski’s campaign seems to be conceding the urban vote in the hope of overcoming it with slight majorities in suburban and rural areas. His plan to eliminate or phase out the state income tax will not get him votes in the inner cities whose residents, including college students, are largely exempt. It won’t even help him win many votes among suburbanites who believe that it is either impractical, or that it will only add to already high property taxes. 

Stefanowski would be much better off in calling for a reduction in the state sales tax, a regressive tax that effects everyone in the state, even those in the inner cities. It is a regressive tax in that the poor pay the same rate as the rich. The tax is the same on diapers as it is on luxury items. I also suspect that a reduction in the sales tax would have great appeal among senior citizens. 

If you check out Stefanowski’s website, you will find a sound economic idea like eliminating business taxes is presented as if it would only benefit businesses.  He fails to point out that business taxes are really paid by those who buy the products and services provided by business. A business must inevitably pass on taxes and administrative costs to consumers or else it must go out of business. 

Stefanowski is a millionaire businessman, and he can’t help looking like a millionaire businessman even if he insists on calling himself Bob. But his campaign should not have been about business, or even about bringing business principles to government. It should have been about fairness for all the people of Connecticut. 

He could have gone to Bridgeport, Hartford, and New Haven and asked people if they had pensions that would guarantee them 70% of their highest salary after working only 35 years. He could have asked them if they even had pensions or benefits at all comparable to those enjoyed by state union employees. He could have asked Seniors if their Social Security checks came anywhere near the retirement benefits of public service workers.

Stefanowski could even have taken a more popular position on tolls and proposed just placing them on I95 at the Greenwich and Rhode Island entrances in the same way as New Hampshire and Delaware. In addition to raising money for needed infrastructure repair, such a moderate proposal would have been a popular vote getter. 

No matter how sound your policies may be, you must win the election to have any chance of implementing them. What’s the good of having good ideas, if you never get a chance to implement. Stefanowski’s Democrat opponent, the far-wealthier Democrat Ned Lamont from Greenwich, the wealthiest town in the state, does not look like a businessman. His strategy is to appeal to the Democrat base made up of public service unions, depressed cities, and suburban women upset about the supposed threat to women’s rights posed by the likes of Trump and Kavanaugh.

Democrat Ned Lamont

Stefanowski has little time left to make a dent in that coalition. Is it too late to go to Bridgeport and Hartford and express concern about the crime rate and the poor schools in those cities which have been controlled and mismanaged for decades by Democrats? It’s worth a try. Otherwise, he will share the fate of McMahon and Foley who spent millions only to come up short.

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Kavanaugh Hearing Conclusion

    

Tarred and Feathered

I did not watch last week’s Senate confirmation hearing that featured the dramatic confrontation between Supreme Court nominee Brett Kavanaugh and Christine Blasey Ford who has accused him of sexually molesting her 36 years ago when she was fifteen years old at a house party. Fortunately, important matters kept me out of the house since I had no desire to listen to what has turned into a national disgrace. 

Nevertheless, on the way home my wife and I turned on the car radio right in the middle of Judge Kavanaugh’s spirited and emotional defense. Actually, I thought something might have been wrong with the reception since it seemed to keep breaking up. Only later, did I discover that it was Kavanaugh himself breaking up in tears as he defended himself from the charges.

I thought that Kavanaugh did an excellent job although it seemed obvious that nothing he said would have had any impact on the Democrat senators on the committee whose minds were made up long ago. One commentator remarked that how you felt about Roe v. Wade determined how you felt about Kavanaugh’s guilt or innocence. 

I did not hear Christine Blasey Ford present her charges but have read about her testimony and the subsequent charges that have come forward. It seems to me that it is not just a question about who is lying and who is telling the truth. It might also be instructive to consider the consequences of their versions of the truth.

I believe that it would have been the easy way out for Judge Kavanaugh to admit that as a drunken teenager he groped a fifteen-year-old and threw her on a bed at a wild house party. He did admit that he liked to drink beer, and it seems that drunken house parties were common in the high school set in which he traveled. He could even have claimed that given his semi-inebriated state, he had no recollection of the incident.

He could then have gone on to say that if foolish and shameful things he did while as a teenager were going to be held against him and disqualify him for office, then many people now in office, even in the Senate, might have to resign their positions. 

But Kavanaugh did not say that. Rather he proclaimed his innocence and argued that it was his behavior and career as an adult that should determine his qualifications to serve on the Supreme Court. Incredibly, the impassioned defense of his innocence only made his detractors more certain of his guilt. Whether Kavanaugh is confirmed or not, his reputation has been tarred for life.

On the other hand, Christine Blasey Ford’s unsubstantiated accusation has made her a national hero in the eyes of half the population. The very fact that her story cannot be substantiated also means that it can never be proved that she was lying. 

Actually, it would not matter to many of her supporters if Dr. Ford was lying or not. They firmly believe that lying and false accusations are just one weapon that they can employ if their cause is just. They can shout down and disrespect opponents whose ideas they cannot abide.

In the recent hearings was it just a senior moment that led Senator Diane Feinstein to wait six weeks to ask the FBI to investigate Dr. Ford’s letter? Why did one of Feinstein’s staffers leak the letter after Dr. Ford had requested confidentiality? Why did demonstrators seek to disrupt the hearings in the first place? Why did Yale Law students travel to Washington to protest, in effect, against due process and the right of accused to be presumed innocent until proven guilty? 

I would not be surprised if Dr. Ford went on to a new position at a more prestigious university. I would also not be surprised if book deals, lecture tours, TV appearances, and a movie are also being proposed. We just have to look at Anita Hill’s rise to fame and position after her accusations against Judge Clarence Thomas years ago. Hill is a darling of the feminist movement while Thomas serves in relative obscurity on the Supreme Court. 

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