$125 billion was the number that shook the state.
The figure made a splash last year when retired lawyer Gordon Hamlin laid bare how deep Connecticut’s pension obligations go. On this week’s episode of the Municipal Voice, a co-production of the Connecticut Conference of Municipalities and WNHH FM, he spoke to that figure, what role municipalities can play, and who will be hit the hardest if state and local governments do nothing.
A former trial lawyer from the Atlanta area, Hamlin first took on public pensions in retirement. He participated in Massive Open Online Courses through Stamford and the Advanced Leadership Initiative at Harvard.
He formed Pro Bono Public Pensions to look at pensions around the country. The dire situation in Connecticut drew him to the state.
“States that know they have a huge problem, those are the states that I need to look at,” Hamlin said.
Calculating pension liability required a calculation of the baseline pension numbers from every municipality — about 200 plans, plus the municipal employee plans — and assessing the average duration of the liabilities.
Through the weeds, Hamlin was able to come up with the figure of $125 billion dollars in liabilities.
It was much clearer that contributions have been lower than they should be.
Hamlin said that the average discount rate in Connecticut – a figure that tells us how we should assess future returns on pension funding – is around eight percent. This is a problem, because the higher the assumed future returns, the lower contributions need to be.
“When you look at the last 20 years of investment returns on an annualized basis, all of those plans have been returning six percent,” he said.
Hamlin cited the California pension plan, Calpers, to show how off-base Connecticut plans have been. Calpers has made tremendous moves to reach seven percent returns.
While some Connecticut plans have lowered their discount rates, “at some point there will be a day of reckoning,” due to forecasting unrealistic returns, he said.
Hamlin said that day will likely come for a generation least prepared for it. Millennials have the highest student debt in the country, lowest marriage rates and the highest average age of first home purchase.
“These are the people who are being asked to pay the $125 billion pension liability,” Hamlin said.
Despite being one of the states with the largest pension funding issues, Connecticut could become a leader in pension reform, Hamlin said.
The lack of county government in the state means that there are fewer moving parts to local government. The state’s populace is well-educated and seems to understand that there’s a problem, Hamlin said.
Hamlin’s solution is to use that agility to start over.
Using Chapter 9 bankruptcy, towns can one by one convert their pensions to a shared risk model, he said.
He asked that people cast aside aspersions towards bankruptcy, noting that a Chapter 9 filing is completely unlike those for private businesses. In Chapter 9, a municipality offers a plan for debt restructuring before a judge who can only approve or deny a plan. The plan itself needs to be approved by the creditors, employees, and retirees before a judge sees it.
But Connecticut’s pension problem will not be solved overnight, even through this method, Hamlin said.
“The concept is going to have to be shared sacrifice. That means all stakeholders participating to solve the problem,” he said.
“What I’m suggesting is that employees, retirees, public representatives, all need to be involved in the negotiating process.”
Government is one of the last entities in the country that still offers traditional pensions, because the primary focus of many politicians is to get re-elected, not to provide services or fix problems--such as unsustainable pensions. Businesses realized years ago that traditional pensions simply are not affordable, so transitioned to 401k plans. Perhaps this is what Hamlin means by "shared sacrifice". The government equivalent to a 401k is a 457 plan..