State spending on retired teachers’ pensions is set to surge $282.7 million next fiscal year – a 28 percent increase the state is obligated to fund and is likely to push the next state budget further into deficit.Independent financial experts informed the state this week that its required contribution to the teachers’ pension fund will increase from $1.01 billion this fiscal year to $1.29 billion in the fiscal year that begins July 1.
Connecticut is on the hook to contribute what the independent fund analysts report is necessary. That’s because in 2008 the legislature and then-Gov. M. Jodi Rell approved about $2 billion in borrowing to bolster the teachers’ pension fund that suffered from decades of inadequate contributions. In the bond covenant— the contract between the state and its investors — Connecticut pledged to contribute the full amount recommended annually by fund analysts.
State lawmakers in recent years have been forced to make large contributions after years of the legislature’s promising future benefits to retired teachers while not setting aside funding to pay for them.
But wait, there's more!
The return on investments announced this week over the last two fiscal years was 1.5 percent.
In a move first proposed by the Malloy administration, The Teachers’ Retirement Board last year voted to lower the assumed rate of return on pension fund investments from 8.5 to 8 percent.
Many states assume their pension investments will earn, on average, 8 percent annually or more across a 25- or 30-year period. But critics in financial services and academic circles have argued ... that the same shouldn’t be expected in the future. Some have suggested a target closer to 3 percent or 4 percent, pointing to the yield on long-term U.S. Treasury bonds.
Moody’s Investors Service proposed a new methodology in July 2012 that used the return of high-quality corporate bonds as its new guideline, noting that their average yield was 5.5 percent in 2010 and 2011.
So to cover a budget gap in 2008, the state borrowed money, and locked itself into full payment of future funding deficits; in effect, promising not to continue to kick the can further down the road. Will that last? We're earning 1.5% on our pension funds while pretending they'll earn 8% "pretty darn soon". To quote Stein's Law, 'If something cannot go on forever, it will stop.'
The only answer to this, for Connecticut and almost every other state (or all of them) is going to be a change in national law allowing states to declare bankruptcy. That'll be interesting.