The State of Connecticut: A Case Study

Boasting a median income greater than any other state in the U.S., Connecticut is a beacon of personal prosperity. Connecticut is also known for something else – something far darker, and much more daunting for future generations: an underfunded state pension system with more than $20 billion in unfunded liabilities heading into 2017. That means that the state retirement system is only 37 per cent funded. What is the state of Connecticut doing to combat this stark reality? The government of Connecticut recently passed a spending plan that would contribute only $2.2 billion per year to the state’s retirement account as of calendar year 2027, meaning the future generations of Connecticut residents will be left paying that debt.

Due to this mounting pressure of looming fiscal hardship, Connecticut has reached out to union leaders within the state to try and reach new agreements for retirement plans and investment strategies. This new strategy resulted in a Tier IV ‘Hybrid” plan for new hires, with the pension fund being supplemented by a 401(k) plan paid for by the employee. This concession, paired with the agreement reached by SEBAC with the state government resulting in a wage freeze for state employees, will result in a $1.3billion decrease in state liabilities by the year 2019. This is a modest decrease in liability for the state government, dropping the deficit from $21.7 to $20.4 billion over that year.

These sorts of concessions by state employees and bargaining on behalf of the state government are just the beginning for the people of Connecticut. Thanks to irresponsible investment decisions and the harsh politicizing of retirement funds, the people are left to clean up the mess made by state government officials. It is time to face the facts when it comes to state budgets and retirement funds; without responsible actions on the side of officials the people will always be left shouldering the burden on mounting retirement costs.

What is the Institute for Pension Fund Integrity?

Over the past five to ten years America has seen a dangerous shift into the politicization of retirement and pension funds. With trillions of dollars and hosting the retirement accounts of millions of public employees, Pension funds are some of the most powerful investment tools in the United States. They manage the retirement accounts of millions of public employees with trillions of dollars at stake. These funds have been weaponized by various politicians and interest groups, with investment actions being dictated by a political agenda instead of fiduciary responsibility. We at the Institute for Pension Fund Integrity (IPFI) want to see this trend reversed- protect the retirement funds of Americans and keep politics out of pension fund accounts.

Sparked by the recent revelations from the New York City and Chicago government officials, IPFI will provide a critical role to help ensure that pension funds are on a path of growth. With investments in these funds needing to produce reliable dividends for decades on end, irresponsible investments can prove incredibly dangerous for retirees and city governments alike.

The states of Kentucky, Connecticut, Illinois, California and numerous others are facing a pension crisis right now. There are billions of dollars of unfunded liabilities across these accounts with deficits growing by the year. Now is the time for the people of these great states to make their voices heard and let their city officials know that their funds will no longer be a source of political clout and meandering. IPFI is fighting for a well-funded retirement system that will provide reliable returns over decades, providing regular dividends for the millions of pensioners calling America home. We do not want to see our state governments- or our state employees- go bankrupt trying to fund retirements due to the whims of a few irresponsible politicians and special interest groups.

The Current State of the United States Pension Crisis

The United States at this time faces about $6 trillion in unfunded liabilities from pension plans. This number has increased by more than $433 billion over the past year even though the U.S. stock market has made consistent gains over that time. This is because of the ever increasing promises of benefits to state and local employees as well as the poor decision making of investors controlling these pension funds.
Breaking that $6 trillion deficit down to the individual level, that debt from unfunded liabilities equates to $18,676 for every man, woman and child in the U.S. This figure takes for granted though that this pension debt is the same for each state, which simply put is not the case. There are some states in which the debt sits at lower than $10,000 per citizen. While still a large number, $10,000 is a fraction of the ratio of unfunded liabilities per citizen in a state like Connecticut or Illinois, where unfunded liability per capita ranges from $28,100 to $45,700 per person.

With astronomical liabilities per capita in a state like Illinois, how could there be local officials trying to politicize these pension accounts? There are pension leaders, for example Chicago Treasurer Kurt Summers, who are campaigning for an overhaul of pension fund accounts into more “socially responsible” investments. This statement has gained the treasurer a sizeable amount of public attention, but does it make sense? In short, no. It does not. The funds that Mr. Summers is campaigning for are unproven, untested investments that have not been proven to provide the sort of long-term returns that are required for accounts like public pensions. There is also the point that these funds are not for Mr. Summers to politicize and use as a weapon; pension funds are not his money. These funds belong to the hard working public employees of his city and state – people that trust their public officials to make responsible choices with their retirement accounts.

The Institute for Pension Fund Integrity expects the same out of elected and other public officials within federal, state and local government. Pension accounts are not tools to win an election or to push a political cause.

Fiduciary Responsibility

Fiduciary Responsibility Paper

As Baby Boomers retire daily and the American population continues to age, one thing becomes clear: public pensions are poorly underfunded. States and cities are facing an impending funding crisis that will burden future generations and taxpayers for years to come. Beyond this, pension fund fiduciaries are increasingly pressured by outside stakeholders to manage the funds based on political whims. While well-intentioned and admirable, pension funds should only be managed to create the greatest returns for fund participants. Detailed in this report is a clear explanation of fiduciary responsibility, a closer look at unfunded pension liabilities, and the politicization of pension funds. The final conclusion is clear: get politics out of public pension management.

Download the report here

Press Release

Institute for Pension Fund Integrity (IPFI) Launches to Address the Public Pension Crisis and the Politicization of Pension Fund Management

Arlington, VA – The Institute for Pension Fund Integrity (IPFI), a project which seeks to ensure that state and local leaders are held responsible for their choices in public pension investment, launched today with the unveiling of its website and first white paper – “Fiduciary Responsibility; Getting Politics out of Pensions.” Former Connecticut State Treasurer and former Under Secretary General at the United Nations Christopher B. Burnham will serve as IPFI’s president.

IFPI’s mission is to help pension plan beneficiaries understand the true unfunded liabilities in their pension system, and to keep plan managers from placing politics ahead of prudent investment. In doing so, it advocates four core principles in public pension management: adherence to fiduciary responsibility; balanced economic, social, and governance factor investments; long term pension fund return; and data-driven investment.

IPFI will provide resources and commentary from thought leaders in the public investment and retirement fields, serving as a base of knowledge and accountability for public pension investment leadership.

“At a time when public pensions are dramatically underfunded, and both inside and outside stakeholders push for politically-driven divestment, something has to be done,” said Burnham. “Public pension fund managers have a fiduciary responsibility to their beneficiaries to make rational decisions based on risk and return, not politics. As the former State Treasurer of Connecticut and sole fiduciary of the Connecticut pension system, I know the importance of keeping politics out of fiduciary decisions. I started IPFI to help inform beneficiaries and policy leaders, and to bring this issue to the forefront.”

Along with announcing its website, IPFI released an inaugural white paper, which examines the state of public pension funds suffering from the most underfunding, even a decade after the Great Recession. The solution is clear: get politics out of public pension management. If a fund manager is investing based on political decisions and not purely on the risk or return, then they are weakening the fund, and undermining its integrity.

“The primary responsibility of a public pension fund manager is to manage the fund investment in a way that guarantees the best possible retirement benefit,” the paper concludes. “Even though many are managed by politically appointed or elected managers, those individuals must ensure separation of politics from pension benefits. Pension funds must be handled responsibly, free of politics and any personal agenda.”

Please visit www.IPFIUSA.org to learn more about the project and to read the white paper, “Fiduciary Responsibility, Getting Politics out of Pensions.


The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

Contact

Molly Hall
202-210-9955
[email protected]

North Dakota Public Employee Retirement System

  • The North Dakota state pension fund is 65 percent funded, with 2.5 billion dollars in unfunded liabilities.
  • There are 21,091 active members of the North Dakota PERS system, with 36, 573 total members.
  • The ND public employee pension requires a six-percent employee contribution rate and there is no mandatory retirement age. There is however a deduction for every year under 65 years of age, which is 6% for each year under that age cap.
  • The Urban Institute gave the NDPERS pension fund an overall grade of “C”, with failing marks in the plans perks for those employees who would prefer to work in their old age. There was also a “D” grade handed down for the funding ratio of the plan and the rewards given to young workers.
  • Retirees with 40 years of service receive social security as well as pension benefits that equate to 112.67 percent of their earnings at age 64.

Resources:
Mercatus Center Fiscal Health of North Dakota
Urban Institute Report on North Dakota Pensions
Fiscal Report: Public Employee Retirement System 2017

Connecticut State Retirement System

  • Connecticut holds the second highest debt per-capita rate in the United States at $35, 721.
  • Unfunded pension liabilities rose from 99.2 billion in the 2016 ALEC study to 127.7 billion in 2017, a one-year increase of 28 billion.
  • The state will be paying over 6 billion to the teacher’s retirement system alone by 2032 if the state fails to meet the discount rate of 8.5 percent
  • Fixed costs take over more than half of the state budget of Connecticut, with pensions, retirement costs and healthcare monopolizing a staggering amount of budget.
  • Connecticut has already faced two tax increases in response to the rise in costs, one in 2011 and the other in 2015. Neither has been enough to make a considerable difference in the pension crisis.

Resources:
Yankee Institute Report
Yankee Institute: Report on Unfunded Liabilities
Mercatus Center Fiscal Condition of Connecticut

South Carolina State Retirement Systems

  • South Carolina Retirement Systems currently hold $24 billion in pension debt and unfunded liabilities
  • The South Carolina pension crisis has been accredited to bad investing- the fund has underperformed their target returns by $10 billion while the state has paid more than $3 billion to Wall Street money managers
  • South Carolina allows for early retirements, 28 year retirements and high cost of living adjustments, adding to the already underfunded pension system debt.
  • For the past 15 years the South Carolina Retirement Systems fund has failed to make the full interest payment, leaving the state an additional $4 billion in debt
  • The total unfunded liability has grown by 6,686% since 1999 and shows no sign of slowing that upward trend.

Resources:
Mercatus Center South Carolina State Fiscal Health Report
Urban Institute Pension Fund Health Report
State Treasurer Report on Pension Fund Health

 

North Carolina State Retirement Systems

  • The State of North Carolina boasts one of the most stable pension systems in the United States at 92% funded
  • The return rate for the $98.3 billion pension fund for 2017 was 13.5%, a high rate accredited to responsible investing by the state treasurer and pension management
  • The State of North Carolina was able to save $60 million in 2017 thanks to a reduction in fees paid to fund managers, a promise given by manager Fowell in 2017.
  • The State fund pays the retirement benefits of 950,000 people
  • The retirement fund consists of both the State and Local Employees Retirement Systems, which are 1 and 95.9 percent funded, respectively.

Resources:
Morningstar Pension Fund Rankings
North Carolina Pension Fund Annual Report
Chief Investment Officer 2018 Report

 

Kentucky Retirement Systems

  • The State of Kentucky is more than $33 billion in debt, holding just $16 billion in total assets
  • The State retirement and health benefits system holds the retirement accounts of 360,000 state workers
  • The state retirement board in 2011 opted to invest in high-risk hedge funds instead of low-risk long term investments that are common for pension funds. Bridging the funding gap was referenced as the reason for the shift to high-risk investment
  • The Kentucky state pension system was $2.1 billion over-funded as of 2001, but now faces a dire situation of 13.6 percent of liabilities covered by the pension account
  • The Kentucky State Retirement System saw its funded liabilities drop from 16 percent in 2016 to just 13.6 percent funded in 2017. The prospects for fiscal year 2018 are even more dismal, as rate of return on investments are still too optimistic at 7%.

Resources:
S&P Market Strategies Report
Mercatus Center Report on Fiscal Health
Saving Kentucky’s Pension Report