Muniland – Get Out of Your Own Way…

Concerns over growing pension liabilities for state and local governments are well documented in the popular press and in the municipal bond community. Some of the biggest impediments to lowering pension liabilities and other post-employment benefits (OPEBs) are legal provisions and court decisions that constrain the ability of states to enact meaningful change. The State of Connecticut may have a plan to get out of its own way and manage its pension liabilities and retiree OPEBs – negotiation.

Connecticut Governor Dannel Malloy and union leaders were able to come to the table and negotiate modifications to the state’s existing pension plan, including revisions for current public employees, which should reduce the state’s pension costs. Under a tentative agreement, employee contributions to the plan will increase by two percent, and pension cost of living adjustments (COLAs) will start 30 months after retirement, instead of at nine months under the current plan. Employee wages will be frozen for three years, which should also help control current expenditures as well as pension costs.

The state also expects to limit future pension costs by adopting a new pension plan for new employees. The new “hybrid” pension/retirement plan will combine a traditional defined benefit plan with a 401(k)-style defined contribution plan. The state and unions also renegotiated provisions to health care benefits by revising health insurance plans and increasing the employee share of healthcare premiums by three percent. The changes are expected to save the state over $1.6 billion over the next two fiscal years, and the state claims the concessions will save the state $20 billion over the next 20 years. 

The proposed plan reaches beyond current and future employees and addresses retiree healthcare benefit liabilities, too. All current retirees over the age of 65 will move to a Medicare Advantage Plan, and retirees will now share Medicare Part B cost. The state currently pays the full cost of Medicaid Part B. In all, the savings could reach $141 million by 2019.

The proposed concessions are crucial to stemming the tide of Connecticut’s fiscal stress and could serve as a road map for other stressed states to follow. Although Connecticut is one of the wealthiest states, it has suffered a string of credit downgrades over the past few years due to structurally imbalanced budgets, revenue shortfalls and ballooning pension liabilities. Governor Malloy was able to convince the unions to modify the pension plan, including provisions for current workers and retiree OPEBs, because of concerns that state workers could be laid off to solve the state’s budget crises. In exchange for the pension concessions, Connecticut will forego layoffs through June 30, 2020, and will increase wages at that time. The tentative agreement must still be approved by rank and file employees and pass the state legislature. If the agreement is ratified, its implementation will be an important step in stabilizing Connecticut’s credit fundamentals and outlook. The agreement also shows that the willingness to compromise on employee benefits, including pensions and retiree OPEBs, can lead to meaningful changes that benefit all stakeholders.