State on same road as Detroit

August 26, 2013

By Sen. Jason Welch

Waterbury Republican American

Detroit may be 650 miles away, but that city’s plight is a cautionary tale for Connecticut. Detroit reportedly faces more than $18 billion in debt and unfunded liabilities. The city is seeking bankruptcy protection.

With 701,475 people living in Detroit, its population is about one-fifth of Connecticut’s. Detroit’s debt is estimated at more than $18 billion, or $25,660 per person. Our state population, according to the latest U.S. Census Bureau report in 2012, is about 3.6 million. Our debt and unfunded liabilities total about $66 billion, or $18,857 per capita. The debt we have accrued may be spread out over more people, but the warning signs are there. As of June 30, 2012, Connecticut’s Office of Fiscal Analysis reported our unfunded obligations total $66.1 billion. That includes bonded indebtedness, $19.3 billion; state employee pensions, $13.3 billion; teachers’ pension, $11.1 billion; state employee retirement health and life, $17.9 billion; teachers’ post-retirement health and life, $3 billion; and cumulative GAAP deficit, $1.5 billion.

It is a bad financial position. Connecticut’s credit was downgraded by Moody’s Investors Services in January 2012, for our high unfunded liabilities. Chicago, population almost 12.9 million, recently saw its credit rating downgraded because of a $19 billion unfunded pension liability Moody’s puts closer to $36 billion. Los Angeles, population 3.9 million, could be facing a liability of more than $30 billion, by some estimates. Connecticut’s liability is twice that size. As elected leaders, we need to be honest with the people who elect us and not sugarcoat reality.

This statement from Rhode Island Treasurer Gina Raimondo says it all: “Real people get hurt when politicians aren’t honest and realistic about the magnitude of these issues. If you use a set of assumptions that makes the problem look smaller on paper today, that’s irrelevant 10 years from now, when the cash runs out and someone needs a pension check.” Treasurer Raimondo helped oversee the overhaul of Rhode Island’s ailing pension system in 2011.

Pension and benefits provided to retirees certainly should be kept. Those were promises made in exchange for work performed. However, Connecticut’s leaders must be clear going forward that we cannot afford to underfund pensions to pay other government expenses or increase benefits without paying for the long term. We are setting ourselves and future generations up for a very crushing fall.

Some solutions elected leaders should be looking at include having future employees on a defined-contribution plan similar to a 401(k), the Rhode Island fix. Interestingly, The Government Accounting Standards Board, which sets the bookkeeping rules for pension plan managers, has implemented new rules. These rules will paint a more realistic picture, cutting the average funding ratio of assets to liability, which was at 75 percent in 2011, to 57 percent, according to a study by the Center for Retirement Research. This no doubt will be a huge wake-up call for states like Connecticut. CNBC recently pointed out Moody’s issued its own state-by-state reality check, based on its estimates of “adjusted” pension fund shortfalls that better reflect the new accounting realities. Based on the adjusted funding gaps, nine states, including Connecticut, would see their funding liabilities exceed an entire year’s worth of state revenues. An entire year!

Connecticut is a lot closer to Detroit than you think. We need to act now.