Increasing Government Transparency

April 8, 2011

In early April the General Assembly’s Appropriations committee considered a bill I submitted; Senate Bill 448, AAC The State Employee Retirement Commission (SERC). This bill would add the state treasurer to the State Employees Retirement Commission and would require the commission to review reports issued by the National Association of State Retirement Administrators prior to adopting the annual and, all important, assumed rate of return for the state’s pension and Other Post Employee Benefits (OPEB) portfolios.

Over the last ten years Connecticut has failed to adequately fund its pension as a result of accepting overly optimistic expectations of the pension fund’s performance. Our state’s unfunded pension liabilities are expected to require $485 of every state resident’s income tax payment in 2012 alone. The assumed rate of return set by SERC has been above the national averages for years and has been higher than actual gains in the portfolios. The mathematical difference over this period has made it nearly impossible to catch up with the fund’s expanding liabilities.

Setting an assumed rate of return is key to properly subsidizing the pension funds, thereby ensuring adequate growth and stability. The State Treasurer, the investment officer for the State of Connecticut, would add valuable insight to the discussion of the official expected rate of return target. When SERC adopts an unrealistic assumed rate of return, one must wonder if the Treasurer is forced to take higher risk than is acceptable for a state pension fund. While this may seem a minor change to the composition of SERC, the value of the voice of our state’s chief investment officer will benefit all taxpayers who will at some point fund our liabilities to a certain degree through their taxes.

Realistically speaking, by accepting an assumed rate of return that is closer to market conditions, we are increasing the difficulty that the legislature faces in crafting the state budget. Nonetheless, we are doing the right thing by being honest about what our obligations are in terms of keeping the solvency of the state and worker’s pension and health care plans intact. This will require the legislature and the governor to allocate more of the state’s resources to the pension funds. While it is easy to underfund the retirement and health care funds with the overly optimistic assumption that that market will provide oversized returns, we must be realistic about meeting the expanding liabilities of the state.

Connecticut has a responsibility to the state employees who have earned a pension, but it also has a responsibility to every taxpayer in Connecticut who helps fund the pension liabilities. Transparency with respect to our budget and our liabilities is necessary so we can adequately fund the plans that are part of past promises the state has made. Having said all of this, as a fiduciaries of you the taxpayer, we must determine ways going forward that create a more affordable and sensible retirement system, including the possibility of shifting to a define contribution system.