Late Tuesday afternoon, Gov. Ned Lamont issued a press release in advance of Wednesday’s planned introduction of his budget. In the release he warns that budgetary structural reforms in the area of the state’s teacher pension are a necessary fix for the state’s fiscal woes. Among the proposals outlined in Tuesday’s release is pension cost-sharing between the state and municipalities–something Wilton officials have long feared would happen.
“This is the ‘Land of Steady Habits,’ but we can’t continue along the same path and expect that things will fix themselves,” Lamont cautions. “Our state needs to make real, substantive structural changes to facilitate a sustainable financial future.”
Lamont’s budget will propose the following:
- Each municipality or local Board of Education will assume at least 25% of the normal teachers’ pension costs that have until now been paid by the state. [The ‘normal’ cost is the current year’s pension obligation, not the old unfunded obligations from past years that have accumulated.]
- Towns with teacher salaries above the statewide median will be asked to pay a share equal to each percentage point they are above the median
- Distressed municipalities will be capped at 5% of their associated normal costs
If the governor’s proposal passes, Wilton might be looking at between $1.75 million-$2.5 million in additional obligations from pension sharing costs alone.
At Tuesday evening’s Board of Selectmen meeting, first selectwoman Lynne Vanderslice broke it down for everyone.
“The total [pension] payment for Wilton last year was $14.7 million. We think roughly $5 million of that is the ‘normal.’ So everybody other than distressed communities would pay at least 25%. For every 1.0% that a community’s median teacher compensation is over the state median [compensation], then you add a 1.0% to that 25%. So if we’re 25% over the median, we could be paying 45%. We could be hit with as much as $2.5 million this year if that’s what gets approved.”
Moreover, there’s another likely proposal from legislators which the governor may also include in his budget–shifting automobile property tax from towns to the state. If that materializes, Wilton would face an additional $6 million revenue deficit. Vanderslice added that the legislation would also allow the state to assess property taxes on homes as well.
Together, the two proposals could mean Wilton taxpayers would have to assume an additional obligation of more than $8 million, on top of whatever increases result from the proposed Town and School FY 2020 budgets.
Of course, the governor’s budget proposal will be just that–a proposal. Once he introduces his budget, it has to go before the CT General Assembly, and face both the Appropriations Committee and the Finance Committee–both of which will likely have something to do with the question of the teacher pension pushdown. Wilton’s State Rep. Gail Lavielle sent constituents a description of just how the budget process works, and we’re running it in another article today.
Initial Response from Wilton Officials
GOOD Morning Wilton caught up with Lavielle on her way back from Hartford to Wilton Tuesday evening, and asked what she thought about the governor’s latest sneak peek at his budget plan.
“There’s a lot missing. It’s difficult to say a lot about it because we don’t have all the information. The fact of pushing any teacher pension costs off on the towns is very disturbing because we don’t know how far that can go over time. It could increase and increase,” she says. “It’s 25% today–what will it be tomorrow? That’s troubling.”
Because the figures aren’t yet defined, it’s hard to say just what kind of impact the push to municipalities could have.
“We don’t know how much that is,” she says, referring to the ‘normal cost.’ “Whatever it is, it will add to our property taxes.”
Even without knowing how much it means for Wilton, even just the prospect of the pension pushdown being proposed is “an alarming development, it’s very concerning,” Lavielle says. “It will be very burdensome to the town, and I would like to stop it.”
Lavielle thought the governor’s press release was confusing.
“The way the wording is you can’t really tell what it says. They’ll add 1.0% to what and it’s 1.0% of what are they going to add to what?” She also says some of the other financial details of the governor’s bonding restructuring aren’t yet clear. “You can’t really do a financial analysis of it.”
Of note is that the governor’s release says that some of the “structural changes require approval by labor”–which indicates not everything Lamont is proposing has been negotiated with the state unions yet.
Vanderslice told her fellow BOS members that she was surprised by the news. “When I read about him supporting the statewide car bill, I thought, okay, we’re probably not going to get the pension pushdown this year. When I see today he’s proposing the pension pushdown, did he abandon the car tax? I don’t know.”
Superintendent of Wilton Public Schools, Dr. Kevin Smith, hadn’t yet had time to assess what it might mean for Wilton. But he did have a strong reaction to the news.
“What we should be paying is zero,” he says. “The state neglected to fund the pension for years, and to have towns fix the state’s problem is unjust. The municipalities that are well run and well managed are being punished for doing things well.”
From the Governor’s Press Release:
Shoring Up the Teachers’ Retirement System and Stabilizing Annual Required Contribution
Working with Treasurer Shawn T. Wooden, Governor Lamont is proposing long overdue changes to the Teachers’ Retirement System. If nothing is done, teacher pension annual costs could increase by nearly $2.1 billion, from $1.3 billion in FY2019 to $3.4 billion by 2032 if the state does not meet its optimistic current investment return assumption, and potentially could increase by billions more if there is a market downturn.
Some of the proposed changes mirror those made to the State Employees Retirement System in December 2016 and include:
- Reducing the assumed rate of return to 6.9 percent from its current 8.0 percent: While there have been years when investments have returned far more than 8 percent, the average over the past three decades shows that those periods are balanced by markets that underperform. Experts believe this is an unrealistic assumption going forward. We need to be realistic about what can be earned on investments, and setting reasonable expectations for how markets will perform will be essential to reining in the unfunded pension liabilities.
- Adjusting the financing schedule to create a new 30-year period: Currently, the majority of the unfunded liability is scheduled to be paid over the next 12 years, which greatly increases the risk of large increases in required contributions. This proposal will stabilize payments by extending the repayment of the current unfunded liability over a 30-year period and smoothing future gains and losses over a longer period. It took more than a century to create the liabilities with teacher pensions, and it is unreasonable and risky to attempt to resolve it all in a short period.
- Strengthening our commitment with the 2008 pension obligation bond covenants: Moving forward, a TRS Special Capital Reserve Fund would be established in order to meet the “adequate provision” requirements of the 2008 pension obligation bonds. Funding of the reserve fund would be accomplished by reserving $381 million of the fiscal year 2019 General Fund surplus. The Special Capital Reserve Fund would be backstopped by lottery receipts in the unlikely event a replenishment of the reserve was needed. The proposed changes will result in contribution savings of $183.4 million in FY 2020, $189 million in FY 2021 and will be nearly $1.5 billion lower than the projected $3.4 billion FY 2032 contribution that would have been required if we make no changes while achieving a 6.9 percent return.
“The plan to restructure payments into the Teachers’ Retirement System represents a new road map for Connecticut’s fiscal future and stability, while minimizing the impact on taxpayers,” Treasurer Shawn T. Wooden said. “It also will allow scarce resources to be directed to the right priorities like economic growth, education, and infrastructure that can move our state forward. Creating this multi-faceted proposal in a matter of weeks is an extraordinary accomplishment and is evidence of what can be done when government works collaboratively.”
In addition, Governor Lamont is proposing a municipal cost-sharing plan under which each municipality or local board of education will be responsible for at least one-quarter (25 percent) of the normal pension cost paid on its behalf by the state. Those municipalities who have teacher salaries above the statewide median will be asked to pay a share equal to each percentage point they are above the median. To avoid further burdening struggling towns and cities, all distressed municipalities will contribute five percent of their associated normal cost.
“We need to think about these long-term obligations as we would a mortgage,” Governor Lamont said. “You wouldn’t pay off your mortgage in a decade, and Connecticut shouldn’t try to do the same with its pension obligations. Stretching out our payments over a longer period of time will allow us to avoid market volatility and bumps, and provide the breathing room to make critical investments in workforce and economic development, transportation, and education so we finally get Connecticut growing again.”