Sam Gurwitt Photo
Wallman: Let’s fix it.
As Hamden politicians pitched their visions of Hamden’s future and their solutions to its problems this fall in their appeals to voters, the word “COLA” began to float about the discourse. Not in soda-floats or vending-machines, but in tough discussions of how to keep Hamden fiscally sound.
For decades, Hamden paid its pensioners more than it had agreed to. Now, as the town faces the crushing payments it must make to revive its pension from a decades-long bout of underfunding, it may try to recoup some of those overpayments.
In Hamden’s pension plan, pensioners get a cost-of-living adjustment (COLA) to their payouts. The COLA is based on the Consumer Price Index (CPI), which is one measure of inflation. The town’s pension plan capped COLA increases at 3 percent. That meant that as long as the CPI exceeded 3 percent, pensioners would receive COLAs of 3 percent; when the CPI dipped below the 3 percent ceiling, they were supposed to receive increases that matched the CPI.
But for decades, Hamden paid a fixed 3 percent every year, even in years when inflation dipped below 3 percent. Recuperating those overpayments could save the town millions of dollars and make a dent in its $464 million pension liabilities.
Hamden closed its town pension plan to new retirees in 2007, and put all new hires into the Connecticut Municipal Employee Retirement System (CMERS). The town’s plan no longer gains new members. But the town still has a long way to go before it has provided all the funding necessary to pay down the rest of the old plan’s payouts.
In 2019, Segal Consulting prepared a report for the Hamden Employees Retirement Board on options for recuperating COLA overpayments. Now, the town is waiting for another Segal report that will show the amount of overpayment to every pensioner. Though the report is not yet complete, Mayor Curt Leng said the overpayments are rumored to total around $10 million, not including interest.
Once the town has the new Segal report, the pension board must decide whether to begin the tricky recoupment process, a move that appears to have no precedent in Connecticut. Leng said it most likely will involve lowering COLA increases for current retirees to make up for overpayments. He said he and the pension board have no intention of lowering anyone’s actual pension payout. Billing pensioners and recouping from the estates of deceased retirees is also not in the cards, he said.
“It’s not the town’s intention to do something draconian like that,” said Leng. “I’m of the philosophy that reform is necessary, but it’s not fair to take away something that was earned and was fairly bargained for at a table.”
How exactly the town will navigate the legal problems of recoupment is unclear. Leng said that for many years, he was told that recoupment is not possible in Connecticut because of state law, though it has been done in other states with different laws.
More recently, however, consultants at Segal and attorneys have said it may be possible after all. Leng said that the town has now been told that it has both the ability and legal obligation to recoup the overpayments.
“Something Tickles The Back Of Your Brain”
Former Mayors Scott Jackson and Carl Amento.
In 2012, then-Mayor Scott Jackson was reviewing Hamden’s pension numbers, and he noticed something odd. It looked like pensioners had received a straight 3 percent COLA. As he understood it, COLA increases were supposed to match the CPI up to 3 percent. It was still the aftermath of the 2008 financial crisis, and the CPI was only 1.7 percent.
Sometimes, he said, “something tickles the back of your brain, and that one tickled the back of my brain.”
He looked at the ordinance that outlined COLA increases. Sure enough, it said that COLA was supposed to match the CPI up to 3 percent. “I talked to the attorneys, the fund managers, and everyone kind of said, ‘Yeah, you’re right.’”
As it turned out, Hamden had overpaid its pensioners for decades. It had paid them a flat 3 percent COLA even in years when the CPI dipped below 3 percent. The mistake far predated Jackson’s administration, and neither he nor anyone else who spoke with the Independent has said they know how it happened.
In order to make the flat 3 percent COLA increases, the plan included a “bank.” Each year the CPI exceeded 3 percent, the town deferred for later payment a dollar amount based on the difference between the CPI and the 3 percent COLA maximum. That deferred amount was then paid to pensioners when the CPI dipped below 3 percent so that even in those years, they got a 3 percent COLA on their pension payouts. Leng said that even after the “bank” had become empty, the town continued to pay 3 percent COLA increases in years when the CPI was below 3 percent.
Until 1993, the CPI generally stayed above 3 percent, according to a 2019 Segal report. Since 1993, the report says, the CPI has averaged a 2.24 percent increase.
In 2013, the town stopped overpaying COLA. Since then, retirees have gotten COLA increases matching the CPI. The town has also renegotiated contracts with almost all town unions to lower the COLA cap to 1.75 percent “active” plan participants (employees hired before 2007 who will get their pension from the town’s plan when they retire). Leng said the town has yet to come to an agreement with the police and fire unions, and that those negotiations may soon go to arbitration.
Back From The Brink
Mayor Curt Leng: Wants COLA back.
In 2013, Hamden’s pension was on an icy slope to emptiness. For decades, the town had underfunded it, even contributing nothing in 2000 and 2001.
As a result, when Segal presented a report in 2013 on the town’s options for keeping out of the red, the picture was bleak. The pension was 14 percent funded. Assets were dwindling rapidly as the town made its benefit payments to pensioners. The town had not paid its annual required contribution (ARC, the amount the town must pay annually to be on track to full funding) since 1993. It still hasn’t, though it has gotten much closer, and must do so in 2021.
If the town continued to make payments into its pension at the rate it was doing — $9 million annually — the fund would become insolvent in five years. In order to reach full funding without making any adjustments to the benefits of pensioners or injecting cash into the fund, annual payments would need to shoot up by $20 million immediately — from the $9 million the town paid in 2013 to $29 million in 2014. They would continue to increase after that. Together with CMERS payments, the town’s annual pension payments were projected to total $60 million by 2041.
No matter what, the town was going to have to increase its pension payments by millions of dollars. But, as the plan outlined, there were a few options that could prevent the town from having to immediately add $20 million to its operating budget. It could inject cash with a pension obligation bond (POB), and/or it could reduce retiree benefits. Either way, the town would still need to increase payments to ARC.
The report showed that the best option was to float the POB, reduce benefits, and recuperate COLA overpayments.
If the town floated a POB, reduced the multiplier used to determine pension amounts, and eliminated COLA completely, it could fully fund the pension by around 2032 with annual pension-related contributions totaling $25 million. Reducing COLA to 1 percent could also lead the town to full funding, though over a longer period of time.
The town chose the bond. In 2013, the Legislative Council approved a $125 million POB to inject cash into the pension. When the town floated the bond in 2015, the pension’s funded ratio shot up to 37 percent, where it has stayed since. As of the last valuation, the pension was 35.55 percent funded. Bond repayments now cost the town $8 million annually, including both principal and interest.
The Uncharted Road Ahead
Henry Nearing of Segal Consulting, who helped prepare the 2019 report and is preparing the next report as well.
In 2019, Segal prepared a report outlining four options for recouping overpayments. Retirement board Attorney Marc Wallman presented them to the board.
In July, board members voted for an option that would recoup overpayments by lowering COLAs until the total overpaid amount has been regained. No pension payout would decrease under this plan; it would only reduce or eliminate payout increases.
The plan requires calculating how much each pensioner was overpaid, and will apply an interest rate to those calculations to account for lost returns due to overpayments. Segal is still working on a report detailing the amount of each pensioner’s overpayment.
Regaining the funds may present significant legal challenges. With no precedent in Connecticut, there is no clear path forward. Nonetheless, said pension board Attorney Wallman, the board is responsible for correcting the town’s past mistakes in administering the plan.
The introduction to the IRS’s Employee Plans Compliance Resolution System, which outlines guidelines for correcting mistakes in retirement plan administration, states that administrators “should make voluntary and timely correction of any plan failures.”
If the town lowers the COLA cap recoup overpayments, it likely has the legal authority to do so. Social security, for example, often recoups overpayments.
Should the town decide to go further, however, and lower the COLA cap for all current retirees for savings beyond recoupment, that would probably require state legislation, Leng told the Independent. It would require negotiating with retirees, and there is currently no one to negotiate with.
“While there’s no known legal method to do this with the state right now, that doesn’t mean we can’t continue to explore it,” said Leng.
Leng said that means the town might need to push legislation through the General Assembly so it can recognize a retiree collective bargaining unit. But getting retirees to come to the table could be difficult.
Hamden Guardian Services Retirees Association President Bob Maturo said he doesn’t think it would make sense for retirees to come to the table. “I personally would not be in favor of unionizing — if that’s what you want to call it — the retirees, because I don’t see a benefit for the retirees,” he said. He explained that if retirees come to the table, it would only ever be for givebacks to the town. “It’s just going to open a can of worms.”
Furthermore, just the recoupments could be tough for retirees. “Trying to recoup the money from the pensioner could create a lot of hardships for the retirees,” said Maturo. The town’s pension is the only source of income for many pensioners, he said, himself included. In many cases the families of retirees also depend on the pensions
“The pensioner would look at it that it’s a mistake on the town’s part, and since 2013, the town has been doing things correctly and that’s really where we feel it should end,” he said.
Another example of Democratic mismanagement over the last four decades. And where was the pension board and the auditors? Asleep at the wheel. And the pensioners, well, it's a mistake in their favor so they are not inclined to correct it. But if the mistake went against them you can bet they'd be screaming for intervention.