CT’s pension debt gets attention, but retiree health care is worse off

Connecticut continues to slash billions of dollars off massive pension debt that dates back more than 80 years, but a second benefit for state retirees isn’t quite as fiscally steady.

The state’s health care program for retired state workers still shifts hundreds of millions of dollars in costs into the future. In other words, the taxpayers served by today’s state employees will rely on future generations to pay a significant share of those workers’ retirement benefits — plus interest.

And while the state employee unions say the program is more stable now than at any other time in its 45-year history, actuarial assessments of the program’s debt have varied greatly from year to year.

All of that means Connecticut’s governor and legislature will have tough questions to answer in a few years when the next state employee benefits contract is up for renegotiation.

Retiree health care has greater debt than pensions by some metrics

“There’s always going to be something else for us to do,” said Sen. Cathy Osten, D-Sprague, co-chairwoman of the legislature’s Appropriations Committee. “It’s 70 years of debt that we’re taking care of.”

Osten was referring to Connecticut’s pension funds for state employees and for municipal teachers — and the fact that legislatures and governors consistently failed to save adequately for both programs between 1939 and 2010.

The problem, which first was brought to light in great detail between 2011 and 2018 by then-Gov. Dannel P. Malloy, effectively shifted huge burdens onto the current generation of taxpayers.

To ensure there are adequate funds to cover benefits once workers retire, pensions rely not only on contributions from employees and from the state, but even more on earnings produced by investing those contributions.

And by failing to save adequately for more than seven decades, Connecticut forfeited billions of dollars in compound earnings over that period.

But retiree health care — also known as Other Post-Employment Benefits or OPEB — is worse off by one key metric.

Connecticut’s pension funds for teachers and for state employees have enough assets to cover 57% and 49% of their long-term obligations, respectively, according to the last actuarial valuations. OPEB’s funded ratio is less than 13%.

And like the pensions, retiree health care has its own convoluted fiscal history.

Launched in 1978 by state law and later guaranteed through labor contracts, the benefit originally had no pre-pay element.

Neither the state nor the workers set aside any money for this. Employees served one or two generations, and their children or grandchildren had to find all the funds to cover retirement health insurance for these public-sector employees.

By the late 2000s, warning bells began to sound.

A 2007 report by the Federal Reserve Bank of Boston found Connecticut had the highest benefit payments per eligible retiree among New England states.

In 2009, the Center for State and Local Government Excellence found Connecticut’s retiree health care liability was the third-highest in the nation, behind only New Jersey and Hawaii.

That same year, Gov. M. Jodi Rell and state employee unions reached a concessions deal that, for the first time, required some employee to contribute toward their retirement health care. It stipulated that new hires and current employees with less than five years of service would contribute 3% of their pay annually until their 10th year of service.

Still, a 2010 study panel launched by Rell reported the retiree health care program had nearly $27 billion in future obligations — and relatively nothing set aside to cover them. Eventually, the panel warned, the annual cost of paying health care for these retirees could destabilize the state budget.

Through concessions packages in 2011 and 2017, Malloy and unions would expand contribution requirements to all workers and require them to contribute for more years; require state government to match those contributions; increase from 10 to 15 years the minimum service needed to secure retirement health care; create disincentives against early retirement; and establish a worker wellness program.

A final key component required retirees first to use the Medicare Advantage program, meaning 90% of the cost of services to retired workers age 65 and older are borne by the federal government, and not by the state.

OPEB continues to shift huge costs onto future taxpayers

But are those changes enough to stabilize retiree health care costs? That depends on who answers the question.

The State Employees Bargaining Agent Coalition, which represents all major unions excluding the state police troopers, says yes.

And there are numbers to support SEBAC’s position.

The annual cost of retiree benefits has been largely stable in recent years, particularly since the comptroller’s office negotiated more cost savings in 2021 with the state’s Medicare Advantage plan vendor.

Between 2018 and 2022, the annual benefits cost has ranged from $593 million to $648 million, according to a review of the OPEB actuarial analyses prepared by The Segal Group of Farmington.

“The situation is likely to improve over time, even without changes to the pre-funding system, because of rules changes we’ve already made through collective bargaining,” SEBAC wrote in a statement. “State workers have already sacrificed far more than their share to help protect the public and state services during the prior times of economic downturn.”

But there are other numbers that are less rosy.

According to the most recent actuarial analysis, the workers and state collectively paid in $291 million in the 2021-22 fiscal year to put toward the future retiree health care costs of present-day employees.

But the actuaries say the amount that would need to be pre-paid in 2022 — if the goal is to leave no expenses for future generations to cover — is $906 million. And because that $615 million differential is being left to the future, actuaries also estimate it will add another $516 million in interest costs.

In other words, Connecticut’s annual spending on retiree health care isn’t all spent on actual health care. There’s a significant interest component added to each year’s bill.

Still another way of putting it, Connecticut could eventually lower the retiree health care bill considerably, if it got ahead of itself and began to save more.

The challenge, though, is that while the current generation of taxpayers is trying to save to cover the benefits of its public-sector workers, it’s also paying the health care of the employees who served its parents and grandparents — plus interest.

Solving one problem at a time

Should the state be saving more money each year for retiree health care benefits?

“Not until we pay down our pension debt,” Osten said.

Entering this fiscal year, Connecticut had deposited about $5.8 billion in budget surpluses into its pensions — and that’s on top of the billions of dollars in required payments it makes annually. Yet unfunded pension obligations still approached $40 billion.

This fall’s $1.9 billion supplemental payment will whittle the debt down more, but Osten noted this problem was created over seven decades and can’t be solved with four years of budget surpluses.

Connecticut remains one of the most indebted states, on a per capita basis, in the nation and has to focus on its biggest problems first, she said, adding that means pensions come before OPEB.

House Minority Leader Vincent J. Candelora, R-North Branford, a former veteran member of the Finance, Revenue and Bonding Committee, agreed that the pension problem had to be tackled first.

Because of the nearly $7.7 billion in supplemental pension contributions Connecticut has made since 2020, state analysts say the required payments in the next budget cycle will be about $600 million less per year than they otherwise would have been.

And Candelora and other House Republicans say the next step is for Connecticut to dedicate some of that annual savings to taxpayers.

Still, the minority leader added, trimming the huge interest charge on the retiree health care program has to be on state officials’ to-do list by the time the next benefits contract is up in 2027.

“It’s one of the more silent problems in the state of Connecticut,” Candelora said. “It’s a huge delta to make up without reform.”

Lamont’s budget spokesman, Chris Collibee, said the state undoubtedly has made great progress toward shoring up the retiree health care program’s finances. But he shied away from addressing whether the program’s long-term future is stable, even though the programs’ finances have been a concern for more than 15 years.

Collibee noted the governor’s budget office next month will submit its annual Fiscal Accountability Report, an omnibus presentation that addresses a myriad of short- and long-term fiscal challenges and trends.

“It would be unfair to comment [on OPEB] without the data set presented in that upcoming report,” he said.

State might not be able to seek concessions yet again

If state officials do hope to take more steps to further bolster the retiree health care program’s finances, concessions may not be an option.

Unionized state employees have approved concessions packages that featured wage, benefit and other givebacks in 2009, 2011 and 2017, while also granting Connecticut permission to re-finance the state employees’ pension in 2016 and again in 2019.

Studies since then have shown that state wages and benefits for new hires are average at best — and in some cases less than that — compared with Connecticut’s neighbors.

And Lamont and many legislators have said the state is struggling to fill vacancies and attract workers in many key departments and agencies.

Collibee declined to comment on any proposals the state might make before the current benefits contract expires on June 30, 2027. It’s not even clear who would be governor at that time. Lamont’s second term runs through early January 2027, and he hasn’t said yet whether he will seek a third term.

SEBAC wrote in its statement that “We are now at the point where we have recruitment and retention crisis doing ongoing damage to the public structures and communities which depend on state services, causing particular hardship to working families, communities of color, our youngest residents, and our oldest. We are not going to agree to make a bad situation worse by lessening the incentive to chose to be and remain in public service.”

The coalition added that Connecticut should be investing in critical services, including “a dedicated, growing and long service workforce.”

Comptroller Sean Scanlon, whose office administers retiree health care benefits, said he is developing a long-term strategic plan for the OPEB system for Lamont and legislators to consider in 2024.

But Scanlon also warned the next step is not about scaling back benefits when many agencies are facing staffing problems.

And while he didn’t offer specifics, he said the next step is not about scaling back benefits but about improving efficiency, and he noted Connecticut has made good progress negotiating savings with insurance companies and promoting wellness among workers.

“I don’t think that we have a five-alarm fire right now,” Scanlon said. “It’s not about saying the system is broken.”