Connecticut State Treasurer Denise Nappier has recommended tapping into the state’s lottery to help fund its Teachers’ Retirement Fund (TRF)
Nappier made her recommendation in a presentation to the Pension Sustainability Commission, which would involve transferring $3 billion in state assets and bonds to the teachers’ pension fund, including $1.5 billion in lottery-backed revenue bonds.
“Years of kicking the can down the road have deteriorated the health of the fund, and the state now finds itself in the midst of another fiscal storm,” Nappier said in a release, adding that the proposal “is designed to put the Teachers’ Retirement Fund back on firm fiscal footing, and represents a concrete, tangible plan that would strengthen the long-term sustainability of the TRF while providing relief to the State and avoiding a potential spike.”
Nappier said that from 1991 through 2005, a total of $979 million was not contributed to the TRF. Had this amount been contributed and invested, she said, taxpayers could have saved approximately $5 billion in contributions. As of June 30, the TRF had assets of $18.1 billion, with liabilities of $31.1 billion for a funded ratio of 57.7%.
In her presentation, Nappier said that an infusion of cash and assets in fiscal 2020 would improve the funded status of the TRF, which would reduce the state’s annual actuarially determined employer contribution (ADEC), without hurting the fund’s cash flow.
She recommended that the state issue lottery-backed revenue bonds to generate cash proceeds of approximately $1.5 billion for deposit into the TRF, in addition to transferring an additional $1.5 billion of state assets. According to Nappier, this would lessen the impact of lowering the investment return assumption to “a more realistic” 7.5% from 8%, which she proposed for 2020. This would comprise one part of the plan, which has three main components.
The second component is to pay off the state’s pension obligation bonds in fiscal year 2026, which is the first full fiscal year they can be redeemed. Nappier said this would allow for more options for responsible recalculation of future contributions. And the third component is to re-amortize the TRF’s remaining unfunded liability, as well as further reduce its investment return assumption to 7%, which she said is more consistent with capital market expectations.
“An essential element for ensuring the soundness and affordability of any actuarially designed plan is consistent funding in an amount determined by the State’s actuaries as necessary to reach full funding at the end of the amortization period,” Nappier said.
According to the Connecticut State Treasurer’s office, infusing $3 billion to the fund in fiscal year 2020, while reducing the return assumption to 7.5% from 8.0% will reduce the state’s ADEC contributions by approximately $941 million for the five years ending fiscal year 2025. The state is required to annually pay the full amount of the ADEC for as long as the bonds remain outstanding and prohibits certain changes to the calculation methods in order to reduce those annual payments. After deducting debt service, the savings to the general fund would be approximately $441 million.
According to Nappier’s plan, after fiscal year 2025, the state would be in a position to pay off the pension obligation bonds for roughly $1.9 billion, using the estimated state contribution, and the pension obligation bond debt service payment for that year. At that point, she said, the bond covenant would disappear and the state then could restructure the amortization of the remaining liability to “smooth out future annual ADEC payments, thereby avoiding the often-discussed potential spike in state contributions.”