Shawn Wooden, Connecticut’s new treasurer, has created a plan he thinks will be more practical to keep bonds paid and the state’s Teachers’ Retirement Fund’s ballooning pension debt in check. The $17.9 billion retirement fund is 56% funded.
If approved by the state legislature, the treasurer’s proposal would implement the “TRF Special Capital Reserve Fund,” an emergency cushion which will pull money from Connecticut’s lottery revenue to support the $2.2 billion bond payments for commitments made in 2008 over a 30-year period.
Overall payments to the plan are currently around $1 billion per year and could go up to $6 billion by 2032 if left unchecked.
“There’s been a lot of discussion in our state over the last couple of years about this … about how unsustainable these payments are,” Wooden told CIO. He said the proposal’s goal is to keep the bondholders happy while increasing the sustainability of the retirement plan, essentially “leveling off” the payments to put full funding back on track. It also looks to quell negative views made by credit rating agencies.
The move is akin to that of New Jersey, another state with a poorly funded pension system that uses lotto earnings to help buff its retirement assets. Lotto money was also suggested to Denise Nappier, Connecticut’s former treasurer, a proposal Wooden said is still on the drawing board.
Under Wooden’s action, the teachers reserve would have an initial funding of $380.9 million of the current year’s surplus. The money will stay put unless needed to fuel the teachers’ retirement plan bonds, essentially setting off what the treasurer calls a “replenishment mechanism.” Connecticut’s net lottery revenue is projected at $371 million in fiscal 2020, surging to $509 million in fiscal 2032.
“That is the mechanism that gives us flexibility to make additional modifications so long as we provide adequate protection for bond holders. This fund is the vehicle to provide that protection by having a fund that is solely there for the benefit of bond holders,” said the treasurer.
According to Wooden, the reserve will only deploy assets to pay the bonds if needed. Once the figure drops below the $380.9 million, “lottery revenues would be transferred to bring it back up to that funding level again.”
Wooden said he has not yet decided how much will be taken annually from lotto money and put into the special capital plan as the idea has yet to be approved by Connecticut lawmakers. He also did not say if he had been considering any reported suggestions from the state task force, known as the Pension Sustainability Commission, which recently asked for an extension to submit its findings.
“The commission is not in a position to make recommendations,” he said, adding that it needs to do more work to “diligence their ideas.”
“What assets could be transferred into a trust? How would they be monetized? What’s that number,” he said.
The treasurer’s lotto concept will change a few things for the teachers’ fund.
First, it will lower the fund’s assumed rate of return, from 8% to Wooden’s “more realistic” 6.9%. It will also extend the funding window (the projected timeframe to reach full funding) more than a decade, from 2032 to 2049. The plans’ funding methodology will change from its current percent of a plan member’s pay to a level dollar amortization, to be phased in gradually over five years.
The assumed rate is in line with amortization changes to the $12.5 billion Connecticut State Employees’ Retirement System in 2017, where its rate was cut from 8% to 6.9%.
“I’ve been very critical over time over discount rates or assumed rates of return that are unrealistically high,” Wooden said, adding that the new targets are similar to “what experts really believe is achievable in the future.”
Wooden also said there would not be any changes to the principal and interest payments for the state’s pension bonds issued to help the fund in 2008.
The treasurer expects the proposal to be voted on in early June, toward the end of the current legislative session. The proposal will be in Gov. Ned Lamont’s Wednesday state budget address, a release from Lamont’s office confirmed.