Connecticut Political Patronage 2019

Connecticut Political Patronage

Terry Gerratana, former State Senator

Ned Lamont, the new Governor of Connecticut, has continued the patronage or political welfare system practiced by his Democratic predecessor, Dannell Malloy. In his first month in office Lamont has taken at least five members of the State Legislature into high paying jobs in his administration. He is still a piker compared to Malloy who elevated about a dozen Democratic legislators to such jobs. 

Serving in the Connecticut legislature is still a part-time job with a salary of about $35000 per year. It makes you wonder why anyone would want such a position but there is a pot of gold at the end of the rainbow. A position in the Governor’s administration is a full time job usually with a six figure salary. Moreover, legislators also get generous benefits including participation in the Connecticut State Employee pension system. What impact will their new position have on their pension benefits?

One of the new appointees is Terry Gerratana, a former State Senator from New Britain. She has served 17 years in the legislature during which she has contributed six or seven percent of her $35000 salary to the pension plan. If she had served three more years in the Legislature, she would have been eligible for a pension of $14000 per year (2% of pay for each year of service). It would require the State to come up with about $350000 to fund her pension.

However, if she makes $135000 in her new position, and works in the Lamont administration for only three years, her average pay for pension purposes will jump to $135000 per year. Instead of a pension of $14000 per year, she will be able to retire on $54000 per year, a $40000 increase. Instead of the State needing $350000 to fund her pension, it will need to come up with $1,350,000. With this one appointment alone, State actuaries will have to add about a million dollars to the State’s pension liability.

I am not saying that Ms. Gerratana is unqualified for her new position, and I am not saying that she is the only Democrat politician to profit from such patronage. I am just using her as an example. She and the other Democratic legislators raised to high paying administrative jobs and judgeships by Malloy and Lamont have added multi-million liabilities to the State’s pension system. 

A relatively small but significant first step in reforming the pension system and reducing future liabilities would be to remove State legislators from participation in the pension plan. Their existing vested benefits could be frozen and all future retirement contributions could be put into a defined contribution or 401k type plan. There is no sacrosanct union contract that would prevent Governor Lamont and his fellow Democrats who control the legislature from implementing this change.

 Just consider that instead of having to come up with a million dollars over the next three years to fund Ms. Gerratana’s pension, the State would at the most only have to match her contribution to the new 401k type plan. Alternatively, State legislators could just be put into the Social Security system like the rest of us. How could newly elected “progressive” legislators possibly object to being in Social Security?

Removing legislators from future participation in the State Employee defined benefit pension plan could be followed by a freeze on pension benefits for all existing State employees not covered by union contractual obligations. These employees would include non-union members and employees of the State’s executive, and judicial branches. It should also include all administrators in the University of Connecticut system. 

 In the future these employees could also participate in a defined contribution or 401k-type plan. This reform would still provide them with a retirement income, consisting of the vested value of the current plan as well as the accumulated value of the new defined contribution plan. This combination would still be superior to what is available to ordinary citizens in the private sector. 

People often fail to realize that the millions going to fund the increased pension benefits for legislators like Ms. Gerratana are dollars that could be used elsewhere. These dollars could be used to fund better salaries for teachers and police officers. They could be used to prevent layoffs of newly hired state employees. They could be used to provide much needed programs and supplies in schools. They could also be used to shore up the social safety net so dear to the hearts of Democrats.

The enormous unfunded pension liability of the State of Connecticut was not even an issue in last November’s gubernatorial election. Unless Governor Lamont and the Legislature get serious about pension reform, the State will face further huge tax increases, cuts in services, and possibly an eventual bankruptcy. 

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Connecticut Pension Reform 2017

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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Pension Plan Reform: the First Step

                                            

Pension plan liabilities are loading states and cities all over the country with huge debt burdens but because of the sacrosanct nature of public service employee contracts, politicians can see no solution other than raising taxes on those who do not enjoy such generous pensions. A first step in reforming the pension systems would be to freeze benefits for all participants in the plans who are not covered by these sacred union contracts, and offer them 401k type defined contribution plans.

There is no contractual reason for elected officials, political appointees, and high paid non-union employees to continue in these plans. Removing them from participation will eliminate a real conflict of interest. How can there be significant pension reform until the legislators and political appointees who negotiated these generous union plans no longer share in the benefits and concessions they gave to the unions. 

My home state of Connecticut provides a good example of egregious excess in the distribution of pension benefits. Just last year Democratic Governor Dannell Malloy appointed two sixty-six year old Democratic operatives as judges on the State’s highest court. The two will be eligible to receive pensions of $100000 per year at age 70 after serving just four years on the bench. It takes approximately $2,500,000 earning 4% to provide an income of $100000 per year.

There was no union contract requiring this incredibly generous pension benefit. It has just been a traditional way to reward friends in high places. In this case, however, public outcry caused the Governor and the Legislature to act almost overnight and alter the pension benefit formula for future judicial appointees. Still, the damage had been done. During his first term the Governor added about a dozen Democratic lawyers to the State’s judiciary. All will enjoy extremely generous pensions after relatively short periods of employment.

The high paid administrators of Connecticut’s University system are also included in the State’s pension system even though they are not covered by union contracts. There is no sacrosanct contractual reason to provide football and basketball coaches whose total compensation exceeds $2,000,000 per year with pensions. Actually, in 2011 a study showed that the top ten pension recipients in the State were all associated with the University of Connecticut, especially its health center and medical school. They were all drawing pensions in excess of $200000 per year, with the highest being about $272000.

Finally, all elected state legislators and their staffs are included in the State’s pension system even though they are not covered by any union contract. It is true that legislators are considered part-time employees and only make about $35000 per year in salary. But there is a pot of gold at the end of their rainbow. During his first term Governor Malloy appointed a number of Democratic legislators to high paid positions in his administration.

These appointments will eventually double and perhaps even triple the pensions they would have received if they had stayed in the legislative branch. A good example is Andrew McDonald, a lawyer and political friend of the Governor’s from their hometown of Stamford. McDonald left the legislature to take a high paying job in Malloy’s new administration. He was subsequently elevated to the State’s Supreme Court where he will be eligible for a six-figure pension upon retirement. If he had stayed in the legislature his pension would have been a percentage of his $35000 salary.

How will it be possible to reform the State’s pension system when the people who are supposed to be representing the public share in all the benefits they confer on the unions? People regard these union contracts as sacred obligations but the legislators and their staffs knew they every concession they made in the past to the union negotiators would benefit themselves or their own family members.

They cannot be part of the pension liability solution as long as they are part of the problem.

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Pension Liabilities

The enormous unfunded pension liabilities of the State of Connecticut have hardly been discussed so far in the run up to the November gubernatorial election. Nevertheless, the question needs to be raised for whoever is Governor after the November election will inevitably have to reform the State’s employee pension plan or face the possibility of bankruptcy.

A relatively small but significant first step in reforming the system would be to freeze pension benefits for all existing State employees not covered by union contractual obligations. These employees would include non-union members and employees of the State’s executive, legislative, and judicial branches. It would also include all administrators in the University of Connecticut system. In the future these employees could participate in a defined contribution or 401k-type plan. This reform would still provide them with a retirement income, based on the vested value of the current plan as well as the accumulated value of the new defined contribution plan, a combination that would still be superior to what is available to citizens in the private sector.

This reform would reduce the State’s enormous pension liability while at the same time eliminate some major abuses. Here are some examples. Governor Malloy recently appointed a 66-year-old leading Democratic politician and lawyer to the State’s highest court. In four years the new judge will be eligible for a pension of $100000 per year for life. It takes 2.5 million dollars earning 4% interest to provide an annual income of $100000. The judge will contribute about 7% of his pay or about $10000 each year to fund his pension. Who will contribute the balance?

The Governor has appointed about a dozen lawyers over age 60 to the bench. Each of them will be eligible for an equally generous and impossible to fund pension. The outcry over the latest appointment was so great that in the waning days of the last session, the Legislature voted to slightly alter the judicial benefit formula, but only for subsequent appointments. The Governor’s picks were left on the gravy train.

During his tenure the Governor has also elevated about a dozen members of the State legislature to work in his administration. Legislators are considered part-time employees and make about $35000 per year. These appointments to high administrative positions, often with salaries in excess of $100000, have a dramatic effect on their State pension benefits. As legislators they contributed 7% of their pay to the State pension plan. At retirement their pensions would have been based on a percentage of their $35000 salary. Now they only need serve three years in their new positions to double or even triple their pension income.

A good example is the case of Andrew McDonald, a lawyer and long time friend of the Governor’s from Stamford. After many years in the State legislature, McDonald was appointed legal counsel to the Governor almost immediately after his inauguration. McDonald’s salary went from $35000 per year to well over six figures. Two years later McDonald was appointed to the State’s highest court with a salary of about $150000. When he chooses to retire, McDonald’s pension will be based on his highest three years pay and not on the $35000 annual salary he made as a legislator. How is it possible for pension actuaries to even calculate State pension liabilities when employees can have such dramatic increases in pay shortly before retirement? I estimate that despite his calls to deal with unfunded pension liabilities, Governor Malloy has added over $50 million to the State’s liabilities with just these few appointments.

Removing legislators and other political appointees from participation in the State pension plan does not involve breaking any sacrosanct union contracts. The plan for future judicial pensions was changed almost in an instant in response to public outcry. Not only will such a reform help to reduce the State’s unfunded pension liability but it should also provide legislators and other officials with an incentive to reform. Under the present system members of the State government were always on the same side of the table with the public service unions when it came to pension negotiations. Everything they gave to the unions also benefitted them since they were participants in the same plan.

Once political fat cats not longer have an interest in preserving the existing plan benefit formula, they might at last be willing to take on the larger issue of reforming the whole system. The lion’s share of the huge unfunded pension liability is the extremely generous contractually binding retirement benefits enjoyed by members of the various public service unions.

The benefits are extremely generous because the retirement income is based on the average of an employee’s highest three years pay. Most state employees start at relatively modest salaries and their pension contribution is a percentage of that amount. Someone who starts at $30000 is required to contribute about $2000 per year to the pension plan. That contribution will never be enough to adequately provide a pension thirty or thirty- five years later of 70% of one’s highest pay. For example, teachers starting today at $40000 will certainly be earning over $160000 by the end of their careers, and be eligible for pensions in excess of $100000.

Even though many public service employees gripe about their pensions, a simple comparison with Social Security will point out the disparity between the benefits that this minority enjoys and those enjoyed by the rest of us who are covered under Social Security. The pension benefit in Social Security is based on an average of earnings over a thirty-year period, and not on the highest three years. Teacher union leaders like to point out that Connecticut teachers are not covered by Social Security, but they react with horror at the suggestion that their Pension plan be replaced by Social Security.

So, how is it possible to reform the pension system without starting a Greek style revolution among our public service employees? Their pension benefits are guaranteed by law and contract. The Governor gave away the store two years ago when he promised no layoffs in exchange for some union concessions. On their part the unions did throw future State employees under the bus when they agreed that new hires would have a different type of pension plan.

Unless a moderate solution is found the State faces either dramatic layoffs, economy-busting tax increases, or even bankruptcy. However, it might be possible to get the unions to agree to a modification of the benefit formula that could be phased in gradually. For those retiring in the next three years Final Average Pay would still be the average of their highest 3 years pay. But for those retiring after, Final Average Pay would be the average of the number of years of service from the present to their actual date of retirement. For example, the pension of an employees retiring in five years would be based on the average of the five last years of service: for those retiring in ten years the pension would be based on the average of the last ten years of pay, and so on. Ultimately, final average pay would be based on the average of an employee’s entire working career.

The adoption of this new formula would not hurt anyone close to retirement. Those further away from retirement would still enjoy retirement benefits superior to anything available to citizens in the private sector. In addition, they would be able to supplement their retirement income by contributing to tax sheltered retirement plans available to public employees.

The new pension formula would allow the State’s pension actuaries to get a much better handle on the actual size of the unfunded liability. After all, how is it possible to really estimate the figure when no one can tell how much an employee will be making in the last years of service? The little reform would also put an end to the nefarious but little known practice called “spiking”, whereby employees find ways to dramatically increase their salaries in the last three years of service.

If this year’s candidates for state office refuse to support some kind of pension reform, whoever wins will have to be prepared to lead the state into bankruptcy.

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Pension Gold

     

The very generous pension plans enjoyed by so-called public service employees are bringing municipalities and even states to the verge of bankruptcy all over the country. The State of Connecticut has recently provided an extreme example of the generosity of these pensions.

The Democrat Governor, Dannell Malloy, has just nominated two lawyers to serve as judges at a salary of $154000. However, both men are 66 years of age and will be eligible to retire in four years and receive a full pension of 66% of their pay for the rest of their lives. In other words, their pensions for serving just four years on the bench will be about $100000 per year, or over $8300 per month.

If we do a little math, we will find that it takes about $2.5 million earning 4% interest to provide income of $100000 per year. No wonder public service workers don’t want to give up their defined benefit plans. No wonder they vehemently oppose any effort to replace them with 401k type plans.

If the judges were to contribute 7% of their pay each year to a 401k type plan, they would put away about $10780 each year for the next four years. By the time they retired, their retirement contribution, including 4% interest, would amount to about $47600, a fraction of the $2,500,000 that the State’s defined benefit plan would be worth.  

Who is going to make up the difference for these lucky lawyers? Of course, it will be the taxpayers none of whom enjoys a pension anywhere near as generous as the State’s judges enjoy. Who has created a system that would allow a judge to retire on $100000 per year after only four years of service?

Why, for example, would the Bridgeport legislative delegation vote almost unanimously to approve these appointments? Do they really think judicial pensions like these are in the best interests of their constituents? Could it be that they are just waiting for the opportunity to just jump on the gravy train themselves?

It is time for the people of Connecticut to give a big thumbs down to this system of welfare for the well-to-do,

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Unfunded Pension Liabilities

Every day newspapers headlines complain of the huge deficits facing government at every level. At the same time, politicians and editorial writers warn that there is a serious problem with “underfunded” pensions. A great part of the debt load in states and municipalities across the country can be attributed to pension plan shortages. Even the troubles of the Federal Post Office are attributable to an enormous gap in pension funding.

Just recently it was reported that the pension plan of the State of Illinois was “underfunded” by a colossal 90 billion dollars. In tiny Connecticut the Governor and the State legislature had to play all kinds of tricks to at least balance on paper Connecticut’s projected two year budget. The City of Detroit is on the verge of bankruptcy largely due to enormous pension liabilities. Everywhere states and municipalities are cutting necessary services and raising taxes in attempts to fully fund pension and other public service employee retirement benefits. 

However, there is no way to adequately fund pensions without significant pension reform. Let me repeat. There is no way to adequately fund these pensions without significant reform. Most state and local pensions are “defined benefit” pension plans. In such plans, the benefit that an employee will receive in retirement is defined by a formula that gives employees a certain percentage of their “final average pay” for each year of service.

In other words, not matter what was earned in the early years of employment, a public service employee’s pension will be based on the much higher pay of the final years of employment. For example, a typical formula will guarantee an employee 2% of pay for each year of service. Thus, someone who reaches the normal retirement age after 35 years of service with a final average pay of $60000 will receive 70% of pay or a pension of $42000 per year for life. At 4% interest it would take a little over a million dollars to provide that annual benefit.

But how is it possible for a pension actuary to accurately predict how much money it would take to fully fund an employee’s pension? For a new employee it would take an annual payment of about $5400 earning 8% over 35 years to accumulate a million dollars. However, if the expected return is not achieved, then the actuary would have to report that the pension account is “underfunded,” and require that additional funds be added to it. So, merely a small reduction in expected rates of return would make a pension plan underfunded. In the last few years as interest rates have dropped dramatically, more and more pension plans have become “underfunded.”

Moreover, it is also very difficult for the pension actuary to predict what the employee’s salary will be in the final years of service. There is no way of knowing what inflation rates will do to salaries in the future, or where the employee’s career will lead. When a new Governor was elected in Connecticut three years ago he took more than six experienced legislators into his cabinet. As a result, their salaries more than tripled and so will their “final average pay” on which their pensions will be based. One was just appointed to the State Supreme court with a salary of $150000 per year, a figure that will soon be his final average pay instead of the $35000 he was making as a legislator. 

It’s hard to believe that “public service” employees don’t realize just how generous this formula is. Certainly, their union leaders understand. Just suggest that their membership shift into the Social Security system and you will send chills up their spine. Social Security benefits are based on average pay over 30 years of employment. In bankrupt Stockton, California a judge gave into union pressure and opted to screw the city’s bondholders rather than alter the generous pension formula. Detroit is about to go into bankruptcy and its public service unions have amassed a huge war just to resist any changes to their pension benefits.

Here is a suggestion for pension reform that will eliminate most of the existing pension liabilities without creating a Greek style revolt on the part of the public service employee unions. Gradually modify the benefit formula for all state employees so that Final Average Pay will be the average of 30 years of service instead of the highest 3 years. Phase in this modification for current employees in the following manner. Final Average Pay for employees who retire in the next 3 years would still be the average of their highest 3 years pay but for all other employees it would be the average of the number of years they have left to go before retirement.

For example, Final Average Pay for an employee retiring in 2017, 4 years from now, would be the average of their highest 4 years service. Final Average Pay for employees retiring in 2023 would be the average of their highest 10 years pay; those retiring in 2033 the average of their highest 20 years of pay; and those retiring in 2043 the average of 30 years pay.

Eventually, such a reform would enable actuaries to more accurately predict pension obligations and help to bring a degree of control and reality to government budgets at every level. It would also bring public service pensions more in line with what ordinary citizens can expect from Social Security. Has anyone ever wondered why politicians expend such time and effort dealing with public service employee pensions, and so little time in dealing with the terribly underfunded retirement plans of their constituents?

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