GE GE Aerospace

By Joseph De Avila 

General Electric Co.'s planned move to Boston and warnings from bond-ratings firms have injected new urgency into discussions about the best way to overhaul Connecticut's pension system.

The state has funded 39% of its obligations to provide retirements for the state's 96,000 employees and retirees, according to the state comptroller's office. To fully fund the system by 2032, as required under an agreement with state-employee unions, the state would need to more than double its $1.5 billion annual contribution in upcoming years.

Democratic Gov. Dannel Malloy wants to make the pension payments easier to handle by stretching them out over a longer period of time and by splitting the pension fund into two accounts. His proposal has raised concerns from the state comptroller and treasurer's offices as well as bond-rating firms.

Now officials from AFSCME Council 4, the state's largest public-sector union, have joined a growing number of skeptics of the governor's idea.

"I think there are better ways of dealing with it," said Salvatore Luciano, executive director of AFSCME Council 4.

Mr. Luciano said he preferred State Comptroller Kevin Lembo's alternative proposal to strengthen the pension system, which doesn't split the fund into two.

Neither approach would change what union members would receive when they retire, and neither adds or cuts pension benefits.

Connecticut is one of several states struggling to cover their financial obligations to retirees, including New Jersey, where Gov. Chris Christie and Democrats have locked horns over how to address a pension system that is underfunded by at least $37 billion.

GE's impending move from its suburban office campus in Fairfield, Conn., has heightened the business community's concerns about Connecticut's economic competitiveness. They say increasing pension costs borne by the state government could trigger tax increases that could scare off companies in the state or those looking to relocate--just like GE.

Moody's Investors Service issued a statement on Jan. 21 following GE's announcement saying the state's pension and retiree health care costs would continue to put pressure on the budget.

Any change to the Connecticut system is subject to negotiation with the State Employees Bargaining Agent Coalition, which represents 15 public-sector unions, including Council 4.

Daniel Livingston, the chief negotiator for SEBAC, said he hasn't taken on a position on either Mr. Malloy or Mr. Lembo's proposal. The state legislature also would need to approve the changes.

Both Mr. Malloy and Mr. Lembo want to change how the state pays down its pension obligations from backloading the payments--with the costs increasing in later years--to front-loading them.

Such a shift would mean higher payments in the near term rather the long term, a change SEBAC has long recommended and still supports. Both the Malloy administration and the comptroller's office say the state's annual payments also would be more predictable.

Clouding certainty on how much the annual pension payment could be under any overhaul scenario is how much the state receives on its return on investing the money.

The state's pension agreement now assumes an 8% return. Boston College published a report commissioned by the Malloy administration that characterized the 8% rate as too optimistic. It said the return has averaged 5.5% over the past 15 years. If that rate continues, the administration estimates the state could pay as much as $6.65 billion in 2032 toward pensions.

But Mr. Lembo says that assumption was too pessimistic, and he calls for lowering the assumed rate of return to 7% from 8%. That means the state's pension payment could rise to $3.8 billion in 2032--still more than the state can afford, he said.

Under Mr. Malloy's proposals, one pension fund would cover employees and retirees hired before July 1, 1984, who account for 72% of the system's $14.9 billion unfunded liabilities. This fund would be a so-called pay-as-you-go plan: The state would make dedicated annual payments from its operating budget to pay for the benefits but no longer invest the contributions.

A separate fund would cover workers and retirees hired on or after July 1, 1984. Benefits for these workers would be almost entirely paid for using the state employee pension fund's current assets of $10.6 billion which would continue being invested.

Under the Malloy plan, annual pension payments would be more affordable because the state would pay smaller annual pension payments but over a longer period. Also, the Malloy administration proposes replacing the schedule to fully fund the system by 2032 with a rolling period--with no set end date.

Mr. Lembo opposes the pay-as-you-go approach, saying it risks placing the annual payment at the mercy of sometimes contentious budget debates at the capital.

Mr. Lembo said it was unclear if Mr. Malloy's approach to split up the system would be legal. He added that bond-ratings firm Standard & Poor's said in November that it could downgrade the Connecticut's bond rating if the state adopts that plan, with the firm saying it would represent a "significant deferral of unfunded pension liabilities after fiscal 2018."

In response to Standard & Poor's warning, a spokesman for the Malloy administration's budget office said its proposal would improve the state's long-term fiscal stability and would save the state billions of dollars.

As with Mr. Malloy's proposal, Mr. Lembo's approach would give the state more time to make good on its pension obligations. Liabilities accrued before 1983 and before would stay on their current schedule and be fully funded by 2032. The liabilities accrued in 1984 and after would be paid off under a new schedule with a 25-year deadline.

Write to Joseph De Avila at joseph.deavila@wsj.com

(END) Dow Jones Newswires

January 29, 2016 19:43 ET (00:43 GMT)

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