A Brief History of Pension Funding in Connecticut

A prolonged biennial budget negotiation in 2017, with Connecticut’s General Assembly roughly split between Democrats and Republicans, resulted in significant fiscal reforms. These reforms included spending caps and mandatory revenue-saving measures, which became known as Connecticut’s fiscal guardrails. They included:

• ​​Spending Cap: Limits the growth in general budget expenditures to the greater of the average five-year increase in personal income or the increase in inflation. This ensures that state spending remains within sustainable limits.
• Revenue Cap: Limits the amount of General Fund and Special Transportation Fund appropriations to a percentage of revenue, directing resources to the Budget Reserve Fund (“rainy day fund”) and providing a buffer against economic and tax revenue downturns.
• Revenue Volatility Cap: Directs collections from volatile revenue sources exceeding a designated threshold into the Budget Reserve Fund (BRF), stabilizing state finances by managing unpredictable revenue streams.
• Bond Lock: A contractual obligation to not redefine or alter the fiscal guardrails by adding them to bond covenants. This prevents the waiving of these requirements unless three-fifths of the legislature and the governor say otherwise. If Connecticut were to violate a bond covenant, investors would see investing in the state as a riskier proposition. Breaking bond covenants would significantly stifle Connecticut’s ability to raise funds through bonds in the future.

The BRF is limited to 15% (increased to 18% starting FY 25) of the net General Fund. Once the BRF reached the threshold, the overflow funds were set to be transferred to reduce the unfunded liabilities of the Connecticut State Employee Retirement System (SERS) and Connecticut State Teachers Retirement System (STRS) — which were in a very dire position, dragging down the state’s creditworthiness and financial status.

In 2016, SERS was in a notably worse position than STRS. The system had a 35.5% funded ratio, only having enough funds to pay for about one-third of the promised retirement benefits to public employees. The median state plan funding ratio in 2016 in America was 70.3%. The underfunding of Connecticut’s pensions resulted from initiatives that underestimated the true costs of promised public employee benefits.

Since 1971, the state has been required to fully fund its plans through the Actuarially Determined Employer Contribution (ADEC), which imposed full payment of normal pension costs and the amortization of unfunded liabilities. Yet both plans became increasingly underfunded year after year. This is mainly due to collective bargaining agreements that altered pension valuations, leading to a chronic underestimation of present costs and underfunding.

For example, a 1992 agreement with the State Employees Bargaining Agent Coalition (SEBAC) extended the amortization period from 30 to 40 years, delaying payments and increasing long-term liabilities. A subsequent 1997 agreement with the SEBAC shifted from “level dollar” to “level percent of payroll” funding, resulting in lower initial payments and larger future obligations. These adjustments were designed to alleviate short-term fiscal pressures and please interest groups by pushing costs into the future — the future in which we now live.

The additional contributions to SERS and STRS in recent years have put both plans on track to correct the past decades of underfunding and eliminate their unfunded liabilities within the next 25 years. Since 2017, the General Assembly has met its ADEC for both funds and contributed additional lump sum funds. SERS’s funded ratio has increased from 36% in 2016 to 50.4% in 2023, while STRS’s funded ratio increased from 56% in 2016 to 59.8% in 2023 — reversing the previous downward trend in their funded ratios (see Figure 1).

Connecticut’s other long-term liabilities have been decreasing, including Other-Post-Employment Benefits (OPEB) and outstanding bonds. As of June 30, 2023, Connecticut’s long-term obligations totaled $81.6 billion, down $6.7 billion from the previous year and $13.8 billion from November 2021, due to measures also imposed by the fiscal guardrails.

These fiscal reforms and responsible funding strategies have led to several credit rating upgrades from S&P Global Ratings, reflecting the positive impact of the fiscal guardrails, ensuring a more stable financial future for Connecticut.

Yet despite the improvement in the SERS and STRS funded ratios, they remain far below their peers in other states. According to Equable’s Pension Plan Funded Ratio Rankings for 2023, STRS’ funded ratio ranks 198th while SERS’ funded ratio ranks 208th out of 225 pension funds in the United States. There may be light at the end of the fiscal tunnel, but Connecticut cannot afford to halt or slow its steady advance forward.