Connecticut has more pension debt per capita than 48 other states, trailing behind only Illinois, per a study released yesterday by the Reason Foundation. Connecticut was also ranked as the state with the 11th largest unfunded pension debt liability. The study was based on the Foundation’s annual pension solvency and performance report, which was also released yesterday.
“This report evaluates state pension systems across five critical metrics: Funded Status, Investment Performance, Contribution Rate Adequacy, Asset Allocation Risk, and Probability of Hitting the Assumed Return,” reads the pension report. “These measures show which states have positioned themselves for long-term sustainability and which face escalating costs that will eventually hit taxpayers and threaten benefit security for public employees.”
Per the report, Connecticut has the 5th worst funded ratio of pension plans and the 6th worst returns on investment from the years of 2001-2024. On the bright side, the report found Connecticut to have the 4th best contribution rate and the 8th best chance of reaching its assumed rate of return over the next 20 years. The state was ranked near the middle of the pack in terms of investment risk, coming in 21st.
Connecticut’s funding ratio, found by dividing a plan’s assets by its liabilities, came out to 59.5%. Essentially, Connecticut has the funds to pay almost 60% of its debt, putting it ahead of Illinois (52%), Kentucky (54.2%), New Jersey (54.9%) and Mississippi (55.7%), but behind 45 other states. Only three states, Tennessee, Washington and South Dakota, fund 100% or more of their pension plans.
“A higher funded ratio means a healthier, more secure pension system,” explained Reason’s pension performance report. “States with higher funded ratios are better positioned to weather economic downturns and less likely to require future tax increases or cuts to public services to cover pension shortfalls.”
The state’s total unfunded pension debt liability, or the total deficit between the plan’s promised payouts and its current funding, was estimated at $37.3 billion. On a per capita basis, Connecticut was found to have $10,151 in pension debt per state resident, trailing only Illinois, which had $15,804 in pension debt per person. The ten states that were found to have a higher total pension debt than Connecticut were Kentucky ($39.6 billion), Florida ($43.9 billion), Massachusetts ($44.1 billion), New York ($44.8 billion), Ohio ($60.4 billion), Pennsylvania ($66.6 billion), Texas ($91.1 billion), New Jersey ($92 billion), Illinois ($200.9 billion) and California ($264.71 billion).
The issue of high pension debt in Connecticut isn’t new, and the severity of the issue is what led the state to implement fiscal guardrails and create a Rainy Day fund in 2017. Since then, the state’s pension performance has improved considerably, but it still has lagged the majority of other states. A 2023 study by the Yale School of Management found the state’s pension investments to be the second worst performing in the nation, one of the reasons Republican lawmakers asked earlier this year for the state to rethink how its Treasurer’s Office works. Reason’s report, which analyzed average vs. assumed rates of return from 2001 to 2024, ranked Connecticut 44th, putting it ahead of Montana, Indiana, New Mexico, Alaska, Maryland and Utah.
Another concern voiced by Republican lawmakers at the time was the potential for risky investment under the state’s current rules regarding the Treasurer’s Office. According to Reason’s report, Connecticut invests 29% of its pension funds into “alternative assets,” which makes it the 21st riskiest investor amongst the states. Reason defined alternative assets as including, “private equity, hedge funds, real estate, and private credit.” While they carry greater opportunity for heightened returns, they also carry greater risk.
On the topic of contribution rate adequacy, or whether states are putting enough money into their pension plans to adequately pay out current benefits and pay down debt, Connecticut was ranked 4th. For fiscal year 2023, Connecticut paid down 10.1% more than asked of it by its “Benchmark 20” rate, or the rate required to pay off unfunded liabilities over 20 years. In fiscal year ’24, which wasn’t assessed in Reason’s report, the state’s Office of Policy and Management announced it had paid at least $608.2 million in surplus revenues for the purpose of pension liabilities.
“Higher rankings indicates states that are making more responsible funding decisions,” explained Reason’s report. “A smaller gap between required and actual contributions means better fiscal discipline and lower long-term costs for taxpayers.”
The last ranking, and perhaps the most important one when assessing the future of Connecticut’s pension performance, was the probability of hitting the assumed return. Reason gave Connecticut a 61% chance of doing so, making Connecticut the 8th most likely to do so. Reason noted it uses “forward-looking capital market modeling,” to calculate each state’s probability to hit their ARR over the next 20 years.
“States with higher probabilities are less likely to accumulate new pension debt from investment return shortfalls, placing a smaller potential burden on future taxpayers,” read the report. “A higher rank indicates a higher probability of success.”
While the recent success of the state to turn around its problematic pension fund has relied on the efficiency of its fiscal guardrails and Rainy Day fund, the state’s adherence to these systems are likely to change, which could drastically change the state’s future outlook. Fiscal stress placed on the state as a result of the ongoing federal shutdown and the impacts of federal funding cuts have led to talks of the state finally tapping its Rainy Day fund, and the state already approved a one time readjustment of the state’s volatility cap to pay for Lamont’s universal preschool proposal.
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