The pension fund for state workers in Connecticut is about, give or take, 60% funded right now. That is still, though, one of the worst in the country.
However, after decades of mismanagement by lawmakers from both parties, it has made a huge turnaround, and that is in no small part thanks to the investments made by Treasurer Erick Russell.
Now he’s considering a different kind of investment. Treasurer Russell explains.
Mike Hydeck: Welcome back, Mr. Russell. Thanks for coming in. So we’re going to get to that little kind of tease in just a minute. I want to give people some perspective. Why was our pension system in such bad shape? As recently as 10 years ago, it was in rough shape compared to the rest of the nation.
Erick Russell: Yeah. I mean, a lot of it has just been, frankly, fiscal mismanagement over a very long period of time. So we as a state went about 70 years without properly funding our pensions. So we have required contributions that we are supposed to be putting in on an annual basis. We’ve done a great job of doing that since about 2011, but for 70 years before that, we were not making those required contributions, and so it left us with a really big unfunded liability, and also restricted us in terms of how we could be investing from a strategic perspective as well.
Mike Hydeck: Right, so money that was supposed to be going into that fund got diverted to whatever, highway, schools, social programs. So what kind of investments, it’s made a big turnaround, especially in the last five to 10 years. What kind of investments is the fund taking advantage of now? Is the state jumping into, because we hear some states, wow, we’re going to jump into crypto. Are we doing that?
Erick Russell: Yeah. We have a very diversified portfolio. So we’re invested globally, from a geographic perspective, and we are invested in every real asset class that you can think of. So things like U.S. equities, but then also things like private credit, private equity, real assets, infrastructure, natural resources. And so the idea here is that, you know, someone will look at the S&P 500 by itself, and say, That’s the measure of the market. The problem is the S&P has had decades of strong under performance too. As long-term investors, we want to make sure that we are putting our state employees and teachers and retirees in the best spot over a long period of time. And so we’ve built out our portfolio in a very diversified way.
Mike Hydeck: And so to be clear, after that 70 years of mismanagement, in the last 10 years, we’ve doubled. Was that funded at 30% now it’s funded at 60% right?
Erick Russell: Yeah. So we had about $30 billion in assets under management about 10 years ago. We’re sitting at about $63 billion in assets under management now, and it’s a real testament to the work that’s been done in the state. I think, one in terms of the state’s overall fiscal health and balanced budgets and surpluses in our rainy day fund, and then using those excess funds that are coming in to pay down that unfunded liability. At the end of this fiscal year, we’ll have paid down likely over $10 billion in total of additional contributions into our pension fund over what’s been required, and it’s been strong performance, which I’m really proud of the work that’s been done by our investment team, by the investment advisory council, over the last few years, which we have a 6.9% assumed rate of return, and we’ve been well over that over the last several years, which is adding billions of dollars to the pension assets.
Mike Hydeck: And I know you are no stranger to the complaint saying, ‘Look, we’re over funding. We’re leaving things on the table like mental health care and special education,’ things like that. Do you get any of that political pressure or is that mostly on the governor?
Erick Russell: I think it’s on everyone. And I think it’s a real reality, right? We are in a spot right now where costs are up, where folks are really struggling with affordability here in Connecticut, but really all across the country. And I think it’s really important that we’re balancing these interests as a state, that while we address our long term fiscal health and we’re paying down these unfunded liabilities, what I also don’t want to do is go 70 years without underinvesting in people, and then have many of these same challenges down the roe like we’ve had with our pension fund, I think as a state, we’ve done a good job in terms of balancing many of those interests as we’ve continued to invest in education and early childcare and many of the other things that are going to build a strong economy and support people here in the state, right? But we certainly need to do more of that going forward.
Mike Hydeck: So now I want to jump into the thing that was put on the table this week, is possibly investing these pension funds that’s performing really well right now in the Connecticut Sun to keep the WNBA team here in Connecticut. Is any other state doing that? Like, is that legal? Can we do that? It was a big shock and a big surprise to a lot of people when that conversation started this week.
Erick Russell: It’s certainly legal. I will say this, there are many other states that are invested in funds or different organizations that invest in sports teams and in media spaces all the time. And I do think it’s really important as we talk about this conversation, we are very early in these conversations. Most of this right now is about the deal and the negotiations that are happening with the WNBA around the team staying here, and what that may look like. Anything from my perspective, that we are talking about in terms of an investment is going to be focused on what is in the best interest of pensioners. That is what guides all of the work that I do in the office. I think there’s a lot of opportunity in women’s sports generally, and in the WNBA, as you’ve seen massive growth. So those are things that we are certainly exploring. Through the treasurer’s office, if there is a way for us to make a really great investment on behalf of pensioners that also benefits the Connecticut Sun staying here, it’s certainly something we’re open to.
Mike Hydeck: So to give people perspective, Mohegan Sun bought the team for $10 million now they’re getting offers of $300 million 20 years later. So that’s one of the reasons why the discussion is at least taking place. So where does it go from here? You’ve had some pushback from Republican leaders, too. They say, ‘Look, don’t touch the pension fund. Fix it. We have a big hole to fill still.’ Where do we go from here?
Erick Russell: Yeah, and I would say to in response to that, if you look at what we’ve accomplished over the last three years, we just announced pension returns over 10% for this fiscal year. We were at 11.5% for the prior fiscal year. To put that in perspective, this last year alone, we added $5.9 billion to the pension fund, about $5.7 the prior year with those returns and the contributions that are going in. I’m not interested in anything that’s not going to be focused solely on moving our pension fund forward. At the same time, we’re going to look for these opportunities, right? And where we are now is, I think most of these conversations are happening between, you know, the governor’s office and the state, the WNBA, Mohegan. As they are looking at what this may look like, we are kind of on the back half of that is, once we see that a deal could potentially happen, we’d be looking at how we would structure it.