SAN JOSE, Calif., January 10, 2017—In comments today to Connecticut Office of Policy and Management Secretary Ben Barnes, the Retirement Security Initiative said that the state’s recent bargaining agreement to revise its pension plan is commendable, but doesn’t go far enough to address the state’s $15.9 billion pension shortfall. The agreement with the State Employees Bargaining Agent Coalition attempts to modify the funding calculation and amortization schedule for the State Employee Retirement System by lowering the pension plan’s assumed return to 6.9 percent.
“While we commend you for your commitment to fully funding pension payments to resolve the unfunded liability, a 6.9 percent rate of return is overly optimistic and is highly likely to result in underfunding the plan,” said RSI Board Member and former San Jose Mayor Chuck Reed in his comments to Barnes.
Instead, RSI recommended that contributions be based on a more realistic rate of return that is closer to the 5.4 percent rate that was achieved by the state from 2001 to 2014.
“If you proceed based on the 6.9 percent number,” continued Reed. “Either more money should be put into the plan by the state and the employees, or plan redesign and benefit changes should be implemented to reduce costs to close the funding gap that will likely be created by assuming a 6.9 percent rate of return.”
According to RSI, the 6.9 percent assumed rate is unrealistic and could lead to Connecticut taxpayers shouldering the burden for decades to come.
“The funding gap between a 6.9 percent rate of return and a 5.5 percent rate of return will be $3.8 billion, which is more than $100 million per year from 2016 to 2046,” continued Reed. “To avoid that shortfall, we would strongly suggest getting as close to the 5.5 percent number as possible.”