Today’s post was written by the Connecticut Coalition for Retirement Security’s Alisha Blake.

Connecticut has five different pension plans. The three largest plans are the State Employees’ Retirement System (SERS), the Teachers’ Retirement System (TRS), and the Municipal Employees’ Retirement System (MERS) – the lesser two being the Judges’ Family Support Retirement System (JFSRS) and the Probate Judges Retirement System (PJRS). The five plans have over $34 billion in assets, 110,000 active members, and over 95,000 retirees. 

A History of Underfunding

Prior to the passage of the Employee Retirement Income Security Act (ERISA) in 1974, it was not common practice in either the private or public sector to pre-fund retirement benefits, and Connecticut was no different. Connecticut’s first tier, Tier 1, was implemented in 1939 but did not begin to receive contributions to pre-fund benefits until the early 1970s. It was not reliably funded until public sector employees organized in the early 1980s and demanded funding as part of the collective bargaining process. Seventy-five percent of the current underfunding is due to Tier 1 obligations for workers who started employment with the state over 30 years ago. 

The biggest reform was the closing of Tier 1 to new employees, which happened in 1984. Since then, all new employees have been hired into tiers which are well funded and quite moderate. At the time, collective bargaining provided a fact-finding process which ultimately created Tier 1.  The fact-finding report was then approved by the General Assembly. The next change occurred in 1997, when the parties signed the 20 year pension agreement and created Tier 2A, which increased employee contributions by two percent.

The Connecticut TRS is governed by the legislature, and has experienced the same issue of underfunding their system for decades. Like SERS, TRS has been in operation since 1939. It is currently funded through the State of Connecticut and contributions from teachers – and yet has managed to accumulate more than $13.1 billion in unfunded liabilities due to the state making no contributions to the fund prior to 1979. The state also failed numerous times since then to make its full annually required contribution (ARC). The TRS is currently constrained by a bond covenant for $2.27 billion in pension obligation bonds sold by the State of Connecticut in 2008. The bond covenant stipulates the State of Connecticut must make its full ARC, and the Connecticut General Assembly cannot change the ARC amount until the bonds reach maturity in 2032.

2009 SERS Retiree Health Care Reform 

In 2009, Connecticut created reforms that focused specifically on retiree health care benefits. All employees hired after July 1, 2005 were required to contribute an additional three percent of their salary over 10 years towards their retiree medical benefits. 

2011 State Employees Bargaining Agent Coalition (SEBAC) Agreement

In 2011, Connecticut’s public employee unions reached an agreement which extended the pension contract for an additional five years and included the creation of SERS Tier 3. Tier 3 increased employee contributions, the early retirement age for non-hazardous duty employees, and the normal retirement age for hazardous duty employees. New public employees also saw a change to the final average salary from the highest three years to the highest five. An increase in the vesting threshold in order to receive retiree medical benefits was also agreed to.

The agreement also doubled penalties from three percent per year to six percent per year for public employees taking early retirement and included additional retiree health care premiums from early retirees. All state employees, regardless of hire date, had to increase their contributions by three percent over 10 years for retiree health care. The normal retirement age was also increased by three years for current employees retiring after June 30, 2022.

2016/17 Reamortization Agreement

In December 2016 (ratified by the General Assembly in February 2017), SEBAC and the Malloy Administration agreed to eliminate the level percent of payroll amortization system which helped cause the slowed progress in paying off the unfunded liability. The agreement eliminated “balloon payments,” which would have been unaffordable in the mid to late 2020s, and reamortized about two-thirds of the debt to a 2045 payoff date. It also recommended to the Retirement Commission a diminution in the rate of return assumption from 8% to 6.9% which was adopted at the same time.

2016 TRS Reform

The state budget that was passed for 2016 outlined a one percent increase to TRS employee contributions for the first time in decades – from 7.25% to 8.25%. Seven percent goes directly into the employees’ membership account while 1.25% is posted to the Health Insurance Fund.

2017 SEBAC Agreement 

Connecticut’s most recent reforms were agreed to in 2017 and created a fourth tier retirement plan with a lower pension multiplier (1.3%) but also included the addition of a small defined contribution aspect (1% contribution by the employee and employer).  Employee contributions are higher and include a new risk sharing component. The agreement included an increase of two percent to all employee contributions into their pensions across the board. The parties agreed that effective in 2022, retirees would see changes to their cost-of-living adjustments (COLA) – from a 2% minimum COLA to one that reflects the CPI-UW (Consumer Price Index for Urban Workers) for the first 2% and then 60% of that increase above that, as well as a delay in retirees receiving their initial COLA to 30 months post-retirement. Hazardous duty members continued to see an increase in their normal retirement vesting requirements as well as the implementation of more effective anti-spiking protections to their pensionable overtime. 

2019 TRS Reamortization 

In 2019 Public Act 19-117 re-amortized TRS’ Unfunded Actuarial Accrued Liability (UAAL) over a 30-year period, switching the amortization method from a level percent of payroll amortization to a level dollar amortization (phased in over five years), and amortizes future gains and losses over closed 25-year periods. The intent of reamortizing future gains and losses in this way is to smooth the impact of large fluctuations on the pension fund. In 2019, the Teachers’ Retirement Board also lowered the TRS’s assumed rate of return from 8.0% to 6.9% to mimic similar changes that had already happened to the SERS. 

Recent Years and Looking Forward

As part of the 2017 legislative session approved the SEBAC agreement, legislators demanded regular “stress tests” to examine the viability of the SERS and TRS pension funds. The 2019 stress test found that the changes made in 2011 and 2017 have greatly stabilized the state pension fund. Former Governor Dan Malloy, whose administration negotiated the 2011 and 2017 agreements with SEBAC, said, “the analysis demonstrates that the actions we took to restructure and reform SERS have been incredibly effective.”