High-tax Connecticut plagued by pension problems
The state faces a projected budget deficit of about $3.7 billion over the next two fiscal years, but it is still trying to figure out how to address the huge gap in pension funding.
A report from the American Legislative Exchange Council said that, as of 2018, the unfunded pension liabilities per capita in Connecticut were $32,805. The only state that the report ranked lower than Connecticut on that metric was Alaska. Connecticut’s funding ratio – which measures the health of a pension fund – was 20.28 percent – the lowest out of any of the 50 states.
And while some states have improved their funding situations, Connecticut was among a dozen states where the funding ratio deteriorated between 2013 and 2018.
According to a 2018 report from JPMorgan, Connecticut would have to pay 35 percent of its total revenue over the course of three decades in order to cover its pension obligations. It currently pays 22 percent.
Out of three different ways listed to address that gap, JPMorgan’s Michael Cembalest said Connecticut would have to increase tax revenues by 12 percent, increase public sector worker contributions by 408 percent or achieve an annual investment return equal to 10.5 percent.
Connecticut’s Democratic Gov. Ned Lamont has proposed dealing with the issue by restructuring the state’s pension obligations over two periods, to save about $9 billion. This would leave about $27.2 billion that would need to be repaid by future taxpayers, a consequence that has drawn criticism.
In Lamont’s budget released earlier this year, he also asked cities and municipalities to share some of the costs.
Other potential solutions include raising taxes and tapping the state’s reserves.
The state offers five pension plans, which have been underfunded for years. Resulting legacy costs were exacerbated by investment underperformance.
Billionaire investor Warren Buffett has cautioned businesses against moving to states with large unfunded pension obligations, telling CNBC’s Becky Quick in February that moving to one of those states is like “walking into liabilities.”
Some companies appear to think similarly. Prominent companies, like General Electric and Aetna, shifted their headquarters out of the state during recent years.
Individuals are moving out, too. As previously reported by FOX Business, of the moves conducted within Connecticut last year, 62 percent were outbound – the third highest of any state. Those with incomes of $100,000 or higher made up the largest share of exoduses.
According to a 2018 Tax Foundation analysis, Connecticut collected the second most in per capita state and local individual income taxes.