CT pension returns a win for both newer state employees and taxpayers

Connecticut’s pension investment returns beat out the state’s assumed rate of return of 6.9 percent in 2023 and marked a dramatic turnaround from previous years following an intensive research report compiled by the Yale School of Management, which found Connecticut’s pension investments were the second worst in the nation up until 2022.

It is not only a win for taxpayers who foot the bill when pension returns don’t meet the state’s benchmark, but also for state employees hired after the 2017 deal struck between former Gov. Dannel Malloy and the State Employees Bargaining Agent Coalition (SEBAC).

Since July of 2023, roughly 14,000 unionized state employees, part of the newest Tier IV employee group, have had an extra 2 percent deducted from their paychecks to make up for the state’s pension investment losses in 2022, when Connecticut saw a negative 10.85 percent investment return.

The deduction is part of the risk-sharing provision in the 2017 contract, which established the Tier IV employee group under a new hybrid pension system that combines a traditional pension with a 401(k) style retirement plan. 2023 was the first time the risk-sharing provision had been used by Connecticut to make up for investment losses.

Now, with Connecticut’s pension investments outperforming the state’s benchmark, returning more than 12 percent over the 2023 calendar year, Tier IV state employees will no longer have the 2 percent risk sharing reduction to their paycheck starting in July of 2024.

In a post to their website, Drew Phalen of SEBAC said the risk sharing provision was enacted in 2023 against their recommendation and is something they will likely try to remove in 2027 when the current retirement and healthcare contract between the state and SEBAC expires.

“The Administration enacted this risk sharing provision against the recommendation of SEBAC as we continue to voice concerns with recruitment and retention efforts leading to short staffing across state agencies,” Phalen wrote in a February 15 post . “While we are glad that this financial hardship will not be impacting Tier IV members starting in July, we expect this provision to likely be an issue in the 2027 pension and healthcare negotiations.”

Connecticut’s pension investment performance was the subject of a recent informational hearing before the Finance, Revenue and Bonding Committee that included testimony from both State Treasurer Erick Russell and the team who led the Yale School of Management’s pension investment research Jeffery Sonnenfeld and Steven Tian.

Sonnenfeld and Tian praised Russell and the Investment Advisory Council (IAC) for changing Connecticut’s investment strategies and for helping implement some legislative changes, such as loosening restrictions on who can serve on the IAC and increasing salaries for investment officers to recruit more talent. Russell also indicated that the state has not continued to invest with outside managers who have underperformed and shifted more money to passive index funds – suggestions that were made in the Yale report.

While the hearing was largely positive, the question of how Connecticut compares its investment returns to others was a point of contention: Russell contended Connecticut was in the top 27 percent of pension performance according to one measurement, while Sonnenfeld and Tian noted Connecticut had gone from second worst in the country to eighth when compared against all other states – a stark turnaround over one year. Sonnenfeld and Tian published an op-ed in the Hartford Courant suggesting further reforms.

However, all agreed that the state’s pension performance had improved. That not only saves taxpayers money, but in July those Tier IV employees will no longer have the 2 percent deducted from their paycheck.

Removal of the risk sharing provision from those employees will likely coincide with further wage increases for state employees under a wage-reopener agreement between Gov. Ned Lamont and SEBAC. In 2021, the General Assembly passed a negotiated $1.9 billion wage contract for the bargaining units covered under SEBAC, which included a wage reopener for 2024.

Under the terms of the wage reopener deal between Lamont and SEBAC, state employees will receive another 2.5 percent general wage increase, along with their annual increment, which generally amounts to 2 percent.

“This agreement continues the current wage pattern, reflecting our need to ensure the retention of our best employees while recognizing the need to be good stewards of taxpayer dollars,” Lamont said in a press release .

The umbrella contract controlling state employee retirement and healthcare will be up for renegotiation in 2027. The contract was first signed between SEBAC and Gov. John Rowland in 1997 and was initially a 20-year deal but was extended another 10 years during Gov. Malloy’s administration, which included givebacks to the state, largely based around insurance costs and the creation of the new Tier IV retirement plan, to save the state billions over the long-term during the 2017 budget crunch.

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