State should look at freezing pensions to ease budget crisis
In Connecticut, the governor and the legislature have failed to come up with a balanced budget despite the constitutional requirement to do so by the end of June.
Faced with this impasse, the governor has sought wage and benefit concessions from various public service unions. If the unions did not agree, the governor threatened layoffs, draconian cuts in state services and new tax increases.
Although the full details of the concessions package have not yet been released to the public or the legislature, it would appear that the unions have accepted a kind of hybrid pension plan for new employees as well as modest increases in member contributions to the pension plan.
In return for these and other concessions, the governor has offered a no-layoff pledge and an extended employment contract that will effectively tie the hands of his successor for the next five years. It remains to be seen whether the legislature will accept this concession package.
However, there are steps that the governor could have taken over the past seven years that would have made a start in reducing pension liability without violating any union contracts. There are many employees who participate in the state’s defined benefit pension plan who do not belong to unions.
First, elected officials do not belong to unions and do not have contractually binding pension benefits. The governor, himself, could have elected seven years ago to opt out of the pension plan and contribute to a 401(k)-type plan. A few years ago a mayor of Bridgeport chose to participate in the state’s pension plan rather than the city of Bridgeport’s. When he left office and returned to his former post at the board of education, his mayoral salary dramatically increased his potential pension benefit.
It would also be easy for legislators to remove themselves from the defined benefit plan. They all could participate in a combination of Social Security and 401(k) plan like the ordinary citizens they are supposed to represent.
Secondly, political appointees do not belong to unions and have no contractual right to be in the state’s plan. They could also contribute to 401(k)-type plans. On taking office seven years ago, the governor appointed a number of state legislators to six-figure posts in his administration. As part-time legislators, their salaries and potential pension benefits were modest, but it only took three years in the Malloy administration to practically triple their average pay for pension calculation purposes. These appointments added millions to pension liability.
Third, judges do not belong to any union and there is no contractual requirement for them to participate in the state’s pension plan. This is another area where the governor has dramatically increased Connecticut’s pension liability.
One of the governor’s first appointments to the bench was Andrew McDonald, a close Stamford friend and longtime legislator. His appointment to the state’s highest court guaranteed him a six-figure pension and not the modest pension that would have come to a legislator earning about $35,000 a year. MacDonald’s appointment was just the first of many where Democrat politicians were given judgeships that would give them six-figure pensions.
A couple of years ago Gov. Dannel P. Malloy nominated two Democrat lawyers to serve as judges at a starting salary of $154,000. Both men were 66 years of age and immediately became eligible for a full pension of 66 percent of their pay when they retired at age 70. For serving just four years, they would have been eligible for a pension of about $100,000. How would it have been possible to fund such a pension? It would take $2.5 million dollars earning 4 percent to provide $100,000 per year income.
The obvious unfairness of these pensions led to a public outcry and the legislature quickly changed the pension formula for new judges. Unfortunately, the change only applied to new judges. The two lucky lawyers were grandfathered in. Their appointments added about $5 million to the state’s pension liability.
Fourth, high-salaried administrators and doctors employed by the state university do not have union contracts. Their existing vested defined benefit plan benefits could be frozen, and future contributions could go into a 401(k)-type plan. Doctors at the UConn Medical Center have been the top pension recipients for years.
I am not suggesting that anyone lose already vested benefits. I am just suggesting that existing benefits be frozen. For example, a legislator who has already served for 20 years would still be eligible for a pension of 40 percent of his or her legislators’ pay. Benefits for future service in any department of government would depend on the amount and value of 401(k) contributions.
The state employs actuaries to calculate the pension plan liability. It should be easy for them to calculate how much the state’s liability would be reduced if the pensions of all non-union government employees were frozen at current levels. I recommended such a study to my state representative earlier this year but I doubt if anything will come of it.
The governor has asked union members to make concessions; he has asked towns to assume part of the cost of the growing pension liability; he has threatened significant cuts in education, health and other necessary social services.
Yet, in seven years he has never suggested tweaking the pension benefits of high-salaried political appointees, judges, and UConn administrators. Millions dedicated to fund pensions for political fat cats cannot be used for the poor and needy.
Francis P. DeStefano, Ph.D., of Fairfield, is a writer, lecturer, historian and retired financial planner.