* Connecticut's 'Other Post-Employment Benefits' and Terra Firma

 

 


 

Connecticut's 'Other Post-Employment Benefits' and Terra Firma

By Julie McNeal, CPA, CSCPA Membership and Finance Director

Expectations are strange things – they aren’t necessarily based on anything other than our own personal realities.

Growing up, one side of our home was built into a sandy hill discouraged from further erosion by a cinderblock retaining wall. The ground between the house and the retaining wall was all sand. My brothers and I spent much of the summer building roads, lakes, and moats with Tonka trucks and water hoses. Our parents left us to our own devices. The only rule I remember: we couldn’t dig a hole deeper than our baby brother was tall.

We would slide down the hill and jump off the retaining wall into the softness of the sand. One summer, I became convinced that I could fly. There was no doubt in my mind – a determined little girl could fly. I practiced jumping and flapping. Hey, what did I know? I was very young, the nation was in the space race, and I suspect I wanted to do something my older brothers couldn’t. I don’t remember what caused my reality to shift to understanding it wasn’t going to work, but imagine how long I would have kept at it if my parents had promised me that I could and given me a piece of paper certifying little girl flight was obtainable.

That’s where we are with Connecticut’s “other post-employment benefit” (OPEB) liability. Promises have been made and contracts have been signed, creating understandable expectations in the abstract. But are those promises aligned with Connecticut’s ability to pay? Post-employment benefits, primarily healthcare for Connecticut retirees and their families, is hard to pin down as an exact number. In total, the dollars are somewhere in excess of 26 billion. One important fact: so far, we’ve set aside less than one percent of the necessary funds.1
Under current inflationary trends, the state would have to reserve 1.9 billion per year for the next 30 years in order to catch up. If the medical inflation rate increases two percent, the number jumps to 3.1 billion per year.2

Comparison of Connecticut’s General Budget Expenditures and Connecticut’s Personal Income

  • From 1987 through 2009, Connecticut’s general budget expenditures have risen from 4.9 billion to 18.9 billion. This represents an average annual growth rate of 6.4 percent and a total increase of 283.7 percent over the 22 years.
  • The coinciding total nominal personal income in the state has risen at an annual growth rate of 4.7 percent, 172.7 percent growth over the same term.
  • In 1987, Connecticut’s general budget was equal to 7.01 percent of total nominal personal income. In 2009, we spent 9.86 percent of the nominal personal income on the general budget.3

Connecticut State Spending Vastly Outpacing Our Ability to Pay for It

  • Between 1972 and 2008, Connecticut’s general fund spending rose about 225 percent while the gross state product rose about 125 percent.
  • Median income growth from 1975 is less than 50 percent and population growth is nearly flat. The growth in state spending really began to accelerate in the mid- to late-1980s.4

Growth in Significant State Expenditures

In order to contain growth, we should understand where Connecticut’s budget outlays are growing fastest.

  • Between 2005 and 2014, projected state employee’s pension and health benefits growth are forecasted to rise 110 percent.
  • Medicaid outlays are projected to grow 54 percent.
  • The consumer price index over the same nine years is projected to rise 25 percent.5

What can the Connecticut Society of CPAs do about any of this? Attending events like “Fixing Our Future” are easy steps – we only ask for an hour and a half of your time. Your participation in an open, respectful dialogue with legislators is crucial, and we hope we’ll see you at our future legislative events.

I’m currently participating in Connecticut’s Post-Employment Benefits Commission along with state, union, and other business community participants. Our mission is to study, analyze, and offer potential short- and long-term suggestions for mitigating the effects of the unfunded pension and other post-employment benefits.

The commission is working on a matrix of ideas, some of which were put to the test during Waterbury’s restructuring. As we get closer to a final product, we’ll provide additional information. The big caveat is that without political will, the commission’s findings and suggestions will never gain traction. Regardless of party, all legislators need to understand how unsustainable these numbers are.

  • Annual required contributions (ARC) of Connecticut’s pensions and other post-employment liabilities total 2.9 billion dollars.1
  • At FYE June 30, 2009, Connecticut collected 12.4 billion tax dollars from all sources.
  • The ARC for pensions and other post-employment liabilities, not including payroll and the other costs of state services, would eat up 24 percent of the total taxes collected in FYE June 30, 2009.
  • It would consume 46 percent of the income taxes collected, 89 percent of the sales taxes collected, and 524 percent of the corporate taxes collected.

New York Times columnist Tom Friedman has been speaking about the dangers of governments and people living beyond their means:
“When you jump off the top of an 80-story building, for 79 stories, you can actually think you are flying. It’s the sudden stop at the end that tells you you’re not.”6

Whether the landing is soft or hard depends on decisions made today. We can’t continue to dig holes deeper than our ability to climb.

Julie McNeal, CPA is CSCPA’s Membership and Finance Director. She is serving on Connecticut’s Post-Employment Benefits Commission along with state, union, and other business community participants. She can be reached at juliem@cscpa.org.

1 The Pew Center on the States, “The Trillion Dollar Gap”
2 Miliman study presented to State Post-Employment Benefits Commission, June 7, 2010
3 Donald Klepper-Smith, “Comparison of Connecticut General Budget Expenditures and Connecticut Personal Income”
4 Yankee Institute, “Connecticut State Spending is Vastly Outpacing Our Ability to Pay for It”
5 Donald Klepper-Smith, “Growth in Significant State Expenditures”
6 Charlie Rose, May 13, 2010