Forensics and the Future of a Connecticut Pension Plan

The State of Connecticut administers six retirement systems. The two largest are the State Employees Retirement System (SERS) and the Teachers’ Retire­ment System (TRS). Over the past decade, despite a concerted effort by the State, the funded s tatus for both these systems declined by about 20 percentage points and, as of 2014, stood at 42 percent for SERS and 59 percent for TRS – among the lowest in the na­tion. The State requested that the Center for Retire­ment Research provide an assessmen t of both SERS and TRS to: identify factors that have led to today’s unfunded liability; project the systems’ finances under their current funding approaches; and present alternatives to shore up the systems’ finances and improve budget flexibility. This brief reports on the results of that effort for one of the Connecticut plans – SERS – and shows how a look backward helps define the options going forward. The discussion proceeds as follows. The first section describes how the plan’s initial legacy costs, combined with subsequent inadequate contributions, returns falling short of assumptions (after 2000), and adverse actuarial experience, contributed to SER S’ current low funded ratio and large unfunded liability. The second section describes the potential for rapidly rising pension costs if Connecticut continues to target full funding by 2032, and it offers two options for more realistic financing of the unfunded liability: 1) replace the 2032 target with a reasonable rolling amortization period; or 2) separately finance the ben­efits for members hired prior to pre-funding on some other basis. The trade-off is that any such relaxation in timing would be accompanied by more serious funding of the plan, using a lower assumed rate of re­turn and amortization based on level-dollar payments. The third section lays out the case for separately financing legacy costs: more equitable and predictable financing of benefits for those hired before pre-fund­ing and a more accurate representation of the cost of benefits for current employees. The final section concludes that adopting a realistic funding scheme is a high priority and that separately financing the l egacy costs is a promising approach not only for Connecticut but also for other states that established plans early and accumulated a large unfunded liability before entering the era of pre-funding.