Pension Funding an Issue in 3 Midterm Gubernatorial Races

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By Madison Alder and Jasmine Ye Han

Midterm gubernatorial races in Illinois, Connecticut, and Colorado could determine a new direction for the states’ ongoing pension insolvency.

Pension funding levels for the three states are among the lowest in the nation. Each of the states’ combined pension plans are funded at 60 percent or less, according to Bloomberg Law analysis of information collected by pension research group Public Plans Data. With hundreds of employees’ retirements in jeopardy, the insolvency is likely to become a hot-button issue in the states’ already contested gubernatorial elections—especially in Illinois, where the primary last month decided candidates in both major parties.

The funding woes in these states have been largely “self-inflicted,” Keith Brainard, research director for the nonprofit National Association of State Retirement Administrators, told Bloomberg Law. Like most states, Illinois, Connecticut, and Colorado attempted some kind of reform in the years following the 2008 recession, which Brainard said has been an “unprecedented era of reform.” The three states are still struggling to close the gap between assets and liabilities in their plan.

The public pensions in Illinois, Connecticut, and Colorado were among the 10 lowest funded in the U.S. when each state’s pension liabilities and assets in 2016 were combined to create a statewide ratio, a Bloomberg Law analysis found. Every state in the bottom 10 had pensions funded below 60 percent. For reference, the average combined funding ratio for state pension systems in the U.S. was about 72 percent in 2016.

Many states have struggled to balance pension assets and liabilities, but the disparity has increased steadily since 2001, according to NASRA’s fiscal year 2016 survey of state pension plans.

Most state and local government employees still have a pension plan, so keeping the pensions solvent for their retirement is important, Brainard said. “I think that, by and large, state and local policymakers have come to better understand and appreciate pensions.”

And yet, many see only two options to keep the plans viable: cut benefits to retirees, or go into debt to maintain the plans.

“Regardless of party, those who want to be fiscally responsible need to be talking about the threat that pension costs bring to their state,” Jonathan Williams told Bloomberg Law. Williams is chief economist and vice president for the Center for State Fiscal Reform at the American Legislative Exchange Council, a conservative policy group focused on small government.

States with pension issues are being forced to talk about the solutions in a bipartisan way, Williams said. For example, he said, the stalemate on how to address the pension in Illinois makes it “ripe for reform.”

Illinois voters in the March 20 primary picked two wealthy candidates to represent each party. The Colorado primary is June 26, and in Connecticut, Aug. 14.

Illinois’ High-Spending Race

Incumbent Illinois Gov. Bruce Rauner (R) will face Democratic challenger J.B. Pritzker in the November general election.

Pritzker, who is heir to the Hyatt Hotel chain fortune, is worth $3.6 billion, according to the Bloomberg Billionaires Index, and former private-equity executive Rauner is worth hundreds of millions. Both candidates already have invested millions into their campaigns.

Illinois’ combined state pension systems’ funding ratio is 47.6 percent, second lowest only to Kentucky, which is funded less by 0.3 of a percentage point.

“The issue is one that is part of the discussion from both of the candidates,” Jim Reed, head of the government relations department for the Illinois Education Association, told Bloomberg Law. Reed said Illinois has not made funding the pensions at a higher rate a priority.

Illinois has attempted several fixes for its state pension in the last few years. Most recently, Rauner proposed in the state budget that school districts and universities share the cost of their teachers’ pensions. The proposal was opposed by the IEA, among others. The final state budget is due in May.

The IEA supports an alternative proposed by Democratic candidate Pritzker to “flatten out” the pension funding, or keeping the yearly funding obligations even instead of ramping them up each year, which is the current plan for the state, Reed said.

A spokeswoman for Pritzker said the most suitable solution “would bump up our current payments while leveling out the amortization schedule, allowing future state budgeting to be more manageable.”

Rauner’s campaign didn’t respond to a request for comment on the pension issue.

The “overarching challenge” for Illinois lawmakers is the state’s constitutional requirement that prevents changes to benefits after a state employee has entered into an employment contract, Brainard said. The Illinois Supreme Court made that clear in 2015 when it unanimously struck down a 2013 law that attempted to decrease benefits.

As a result, reforms impact only new hires and can’t diminish the cost of the unfunded liability, he said.

Connecticut Race Unclear

Connecticut follows Illinois in the rankings for total unfunded pension liability, with a 47.8 percent funding ratio. The three state pension systems had about $31.1 million in assets and $65 million in liabilities in 2016, according to a Bloomberg Law analysis. More than 91,000 Connecticut residents were beneficiaries of the plans.

Incumbent Gov. Dannel Malloy (D), who Brainard said has traditionally sided with labor, announced last year he wouldn’t run for re-election. Connecticut is one of the few states where pensions are collectively bargained.

An early poll showed voters leaning toward Republican candidates for governor, like New Britain Mayor Erin Stewart and Danbury Mayor Mark Boughton. About half of voters—50.9 percent—polled in February by Tremont Public Advisors said they would opt for a Republican candidate over a Democratic candidate. Primaries in Connecticut will be held Aug. 14.

A close race in Connecticut would be an “indication that perhaps people are frustrated with fiscal matters and pensions are certainly part of that,” Brainard said.

So far, the only candidates for governor who have mentioned pensions on their campaign websites are Connecticut Secretary of State Susan Bysiewicz (D) and businessman Ned Lamont (D).

Colo. May Reach Solution

Colorado’s combined pension systems’ funding ratio was at 57 percent in 2016, putting it just a few spots above the Illinois and Connecticut plans. About 107,000 Colorado residents were beneficiaries of the state’s pensions in 2016. The three plans had $41.2 million in assets and $72.2 million in liabilities, Bloomberg Law analysis found.

The state legislature is working on creating a solution for the Public Employees’ Retirement Association system—known as PERA—and if everything goes as planned, it will have it signed by the current governor before the session ends in May, Lynea Hansen, executive director of Secure PERA, told Bloomberg Law.

The Republican-held Colorado Senate recently passed PERA reform measures that included increased employee contributions and cuts to the cost of living adjustment for retirees, Hansen said. The Democratic-held House will take a stab at its own reform measure next—likely adding points like employer contributions to its bill—and then the two houses will hold a joint conference to come up with a solution.

One candidate for governor is a big part of that conversation.

State Treasurer Walker Stapleton, the Republican front-runner for governor, “has been adamant about no additional employer dollars into PERA,” Hansen said. His opinion isn’t popular among employees and retirees “who have kept up their end of the deal,” she said.

On his campaign website, Stapleton said PERA would be one of his main issues to tackle if he were elected. Stapleton was not immediately available to respond to Bloomberg Law’s request for comment.

The fight for the Democratic nomination for governor is more crowded. Former State Treasurer Cary Kennedy, Rep. Jared Pollis, former state Sen. Michael Johnston, and Lt. Gov. Donna Lynne all will be on the June 26 primary ballot. Two-term Colorado Gov. John Hickenlooper (D) is bound by term limits and isn’t running.

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