(HARTFORD, CT) – Governor Dannel P. Malloy and representatives from the State Employees Bargaining Agent Coalition (SEBAC) today announced that after months of productive negotiations between the administration and SEBAC representatives, an agreement has been reached to modify the funding calculation and amortization schedule for the State Employee Retirement System (SERS) in order to allow the state to fully fund its obligations while continuing to support the SERS system.

The agreement includes:
* Reducing the assumed rate of return from 8 percent to 6.9 percent;
* Transitioning from level percent of payroll to level dollar amortization over five years;
* Moving to Entry Age Normal cost methodology;
* Maintaining 2032 as the payoff date for the unfunded liability accrued through December 31, 1983; and
* Extending the amortization period for the balance of the unfunded liability in a new 30-year period.

The new 30-year amortization period will include a new mechanism to SERS, which will allow for future gains or losses to be amortized over 25 years, thus absorbing market shocks or actuarial variance over a longer period of time rather than back loading the amortization period and resulting in large actuarial required contribution (ARC) payments that would destabilize the budget.

“I am very grateful to SEBAC leadership that we were able to reach this much-needed and forward-looking agreement. It was incumbent upon us to reform this system before facing the fiscal crisis that could have resulted from $4 to $6-billion-dollar ARC payments,” Governor Malloy said. “This agreement does not alter employee benefits or employee contributions in any way – it simply allows the state to fully fund its obligations at realistic amounts that will end with Connecticut resolving the unfunded liability and emerging with a system that is fully funded.”

“I applaud Governor Malloy and SEBAC for finding resolution to these very complex issues. These negotiations highlight how committed we all are to addressing the budget challenges facing the state—keeping our promises to the men and women who have given years of service to Connecticut, and ensuring budget sustainability. I congratulate the Governor and SEBAC on this success and thank them for their work,” said Lieutenant Governor Nancy Wyman.

“Under the new methodology, the state will remain on schedule to vanquish $4.3 billion in unfunded liability by 2032 and will resolve the remainder of the unfunded liability by 2046 – but with the ARC smoothing out over the new 30-year schedule to remain between $1.5 billion and about $2.3 billion, providing much needed stability and predictability to the budget and to the marketplace,” OPM Secretary Ben Barnes said. “I would like to thank the leadership of SEBAC for being great partners throughout this process and helping us reach an agreement that will improve the state’s finances and help support the SERS system into the foreseeable future.”

A new valuation of SERS will be completed based on these changes and should be ready and available in the coming weeks. The new valuation will give a more accurate and complete projection of ARC payments in the out-years.

* Over many decades, legacy costs, insufficient contributions, returns on investments less than the assumed rate, and unwise actuarial assumptions have created an unfunded liability of nearly $15 billion for SERS. Despite leaning on current employees with increased contributions and less generous potential benefits, the unfunded liability continues to increase.
* SERS was funded at 41.5 percent as of June 30, 2014 – among the lowest rates in the nation.
* SERS was established in 1939, but not pre-funded until 1971. The years of unfunded benefits saddled us with billions in unfunded liabilities.
* Historically, Connecticut has fallen short when it comes to calculating the appropriate payment to keep the unfunded liability from growing and then making the full payment.
* Prior to 2000, SERS calculated amortization payments would have reduced the unfunded liability- if paid- but failures to prioritize these payments led the State to underpay for many years. At Governor Rowland’s insistence, from 2000 onward, the amortization payment was calculated using a methodology that allowed the unfunded liability to grow for many years before declining. So, while the State paid more of its required contribution after 2000, the contributions were inadequate to keep the unfunded liability from growing.
* The use of “level-percent-of-payroll” has added a combined $2.3 billion in unfunded liabilities to SERS, while underpayment of the required contribution, however calculated, has added a combined $3.2 billion in unfunded liabilities to SERS.
* Actuarial experience has accounted for $4.1 billion in unfunded liabilities for SERS since 1985. One contributing factor may be the ad-hoc early retirement incentive programs (ERIP) introduced in 1989, 1992, 1997, 2003, and 2009. These programs directly impact the retirement patterns of members and likely cause dramatic deviations from the existing actuarial assumptions for retirement. Overall, we estimate that at least $1.5 billion, or just over a third, of the $4.1 billion is directly due to the ad-hoc ERIPs.
* The remaining portion comes from deviations in other assumptions such as mortality, turnover, and salary growth, and likely includes some residual impacts of the ERIPs.