You read that right. Connecticut’s funding of its pension obligations ranks #48 in the country only to be outdone by Kentucky and Illinois.
Connecticut, with a pathetic 51.9% of assets to pay future obligations isn’t even close to dealing with its unfunded pension obligations. Like so many other states in similar predicaments, i.e.: Rhode Island, they continue to hope that the stock market will bail them out.
Connecticut assumes that it’s pension assets will earn a future rate of return of 8%. But, as I’ll point out, that basically means that it will need a 12% average annual return from the stock market. Any prudent fiduciary would not advise such a rosy future for the stock market.
Connecticut’s plan is not invested all in stocks. For argument sake, let’s assume it has a 60/40 stocks/bonds mix like Vanguard Wellington mutual fund. In my back-of-the-napkin calculation that would mean the stock component would have to return 12% to meet the assumed rate of growth of 8% (I’m using 2% interest rate for the bonds).
A 12% long-term rate of return is about as useless as the politicians running the state. The only way to get out of this mess will be to file for bankruptcy. Get out while you still can because the talking heads still don’t see the problem, as the WSJ reports:
Some Connecticut officials and union leaders said they are unfazed by the pension problems and pledge to reverse the deficit in the coming decades. Their strategy hinges partly on predictions the various state retirement systems will be able to earn 8% or more annually, a goal that is more optimistic than most public pensions across the U.S. The average target for all state plans is 7.68%, according to the National Association of State Retirement Administrators.
“The truth of the matter is that the state of Connecticut can afford to make up the difference over time,” said Dan Livingston, a Hartford-based labor attorney who has negotiated on behalf of the state’s public workers for decades.
Connecticut’s pension gap developed as a result of decisions made over decades to scrimp on payments when the economy sputtered and to cut taxes, according to state leaders and public-finance experts. And there is a quirk: Connecticut officials contributed almost no money to the state’s various public pensions from the late 1930s until the early 1980s, meaning little had been saved up because the state had chosen not to prefund the retirement system for future payouts.