Just as Wilton has begun developing our FY 2018 budget, so have the Governor and the State Legislature. Facing an estimated $1.4 billion deficit in FY 2018 alone, last week Governor Malloy presented his proposed budget. For Wilton his proposals mean a more than $1 million reduction in educational aid and a $4 million bill from the State teacher pension plan. If both are adopted by the Legislature, they could mean an approximate 5-percent increase in Wilton’s annual budget.
Many of you have contacted me to gain an understanding of the issues related to the teacher pension proposal. The following is an overview of the plan, the possible impact on Wilton property taxpayers and what we can do as a community in response.
The obligation for teacher pension rests with the State. Teachers participate in a defined benefit plan, funded by the State and themselves and negotiated by the Governor.
Teachers contribute 6-percent of their wages to their plan. The plan is the teachers’ only retirement benefit, as teachers do not participate in social security. Neither teachers, nor the Board of Education on behalf of teachers, pay 6.2-percent employee and employer social security contributions.
The plan is significantly underfunded for three primary reasons: First, the State did not pre-fund the plan until 1979. That is, as teachers earned their pension benefits the State did not set aside monies to pay those benefits. Second, once the State began funding, they did not generally make the full required annual contribution until 2008 and thereafter. Third, the pension fund’s actual investment performance has been lower than the assumed investment rate of return.
As of June 30, 2014 the plan had an unfunded liability of over $10.8 billion, which jumped to $13.2 billion as of June 30, 2016, partially driven by a reduction in the assumed investment rate from 8.5-percent to 8.0-percent. This 8.0-percent rate still greatly exceeds recent actual investment earnings. The plan is 56-percent funded. The State’s required contribution for FY 2018 is 28-percent higher than FY 2017. This increase appears to drive the Governor’s decision-making in asking towns and cities to pay one-third of the State’s required pension contribution.
As of June 30, 2014 Wilton’s share of the unfunded liability was $101 million. To put that number in context, it was more than 10 times the unfunded liability of the Retirement Plan for the Employees of the Town of Wilton. A plan that is 91-percent funded.
The Governor has proposed Wilton participate in paying one-third of the cost even though he will retain authority to negotiate the terms of the pension. He has stated the teacher contribution of 6-percent will not change, even though the rate has not increased since 1992. He claims wealthy communities account for a disproportionate share of the State’s total annual contribution because wealthy towns pay their teachers more. This statement is true. But, the Governor also claims wealthy communities can absorb the contribution imposed without their having to increase taxes. This is not an accurate statement.
Whatever reserves we may have to fund a share of the current year’s $4 million contribution, an equivalent increase in FY 2019 taxes will be required as those reserves will be gone. We must exercise caution, as not maintaining adequate reserves will mean higher bonding costs for the remainder of the Miller-Driscoll renovation, planned road restoration, the upcoming police station renovation and our other bonded expenditures. Right now we are an Aaa town in a Aa3 outlook negative state. This is not the time to risk our credit rating for a one-year tax deferral.
We all recognize the seriousness of the State’s financial position. As Connecticut taxpayers, we expected to bear some of the burden. But if the property taxpayers of Wilton are to be asked to assume State pension obligations, we must ask the State in return to model actions we have taken with respect to management of costs associated with pension benefits. Increase employee contribution rates for defined benefit plans and place new employees into defined contribution plans. In addition, the existing binding arbitration processes, which drive up wages, should be revised. The Legislature must provide greater relief from state education and municipal mandates than proposed by the Governor. These tools are essential to properly address our town’s future.
Between now and the Annual Town Meeting, the members of the various town boards will be monitoring and responding to activity in Hartford. I urge you all to do the same. Please stay informed. Please write, call and or visit the Governor and the Legislature and advocate for additional mandate relief and changes to pension and binding arbitration.
Sacrifices will have to be made. We must collectively decide how those sacrifices can be fairly shared.