Hartford Business Journal

8 Hartford Business Journal • July 20, 2015 www.HartfordBusiness.com CT urged to get fiscal house in order before health, social costs skyrocket By Brad Kane bkane@HartfordBusiness.com C onnecticut has a $47.2 billion unfunded obligation to its retiring state workers. If those costs and more aren't reconciled over the next 20 years, state government — without significant eco- nomic growth — will have to raise more taxes or slash ser- vices to pay for all the expected and unexpected health and social costs that come with an aging and retiring population, particularly among the private workforce. "It is safe to assume that we, the state government, need to get our financial house in order because there is going to be demand placed on our services, some anticipated and some unanticipated, that have the potential to be very big," said State Comptroller Kevin Lembo. As demonstrated this past legislative session, the state budget already is strained, as Gov. Dannel P. Malloy and the Connecticut General Assembly had to raise taxes by $1.3 billion — the second largest tax increase in the state's his- tory — mostly just to maintain the status quo on spending, Lembo said. The budget, however, is completely unprepared for sig- nificant increases in program demands — such as health care and food and housing assistance — that are likely to accompany significant workforce retirements and an aging population, Lembo said. "We have to start living within our means, and we aren't there yet," said Donald Klepper-Smith, a New Haven economist. "There is every indication that we are a state that doesn't have a revenue problem. We are a state with a spending problem." Shrinking workforce In the next 10 years, 35 percent of Connecticut's popula- tion will be aged 55 years or older, according to the Con- necticut Economic Resource Center. At the same time, the size of Connecticut's workforce is shrinking. A report by New York City business research- er The Conference Board said the state's working popu- lation will shrink 3.3 percent in the next 15 years, factoring in retirements, births, emi- gration and immigration. That's problematic because the workforce pow- ers the economic engine that funds the state budget and pays for social services for those too young or too old to work, Klepper-Smith said. In the next 15 years, the size of Connecticut's nonwork- ing population (those aged under 18 and over 65) will be nearly equal to its working population, Klepper-Smith said. "If we end up having an outmigration of young work- ers because they don't see Connecticut as a good place for them, then we have an even bigger problem," said Peter Gioia, economist for the Connecticut Business & Industry Association. A $47B repayment plan One major expense directly related to the aging workforce that Connecticut must get under control before the mass retire- ments start is its obligations to state employees, particularly for pensions and other postemployment benefits (OPEB) like health care. Connecticut is the third worst state in the nation for its unfunded pension liability, behind only Kentucky and Illinois, according to Standard & Poor's Rating Services. Connecticut has funded 49 percent of what it needs to fully pay the pensions of its current and retired employees, leav- ing a $25.2 billion liability on top of what it owes to stay current every year. The large unfunded liability was the result of the state for years paying less than what it needed to stay current. Since becoming governor, Malloy has prioritized getting the pension system fully funded, developing a 20-year plan to drastically increase pension payments. The state followed that plan for the last three fiscal years and will spend $1.5 billion in fiscal 2016 on its pension, 82 per- cent of which will help cover unfunded obligations. If the state can stay the course over the next 17 years on Malloy's repayment plan, the annual pension payment will drop from roughly $1.5 billion today to $275 million. That would give state government more than $1 billion extra each fiscal year to deal with the rising needs of an aging population. "Paying off the pension will help with long-term issues. The alternative of not doing that is pretty damaging," Gioia said. Unfunded Obligations Connecticut ranks as one of the worst states in the nation for its unfunded pension and healthcare benefit obligations to state employees. Additionally, Connecticut has the worst tax-supported debt per capita in the nation. Obligation Unfunded Obligation Per Capita National Rank Unfunded Pension $25.2B $7,011 48th OPEB $22B $6,108 48th Tax-support Debt $18.3B $5,081 50th Connecticut's combined debt and pension obligations are 17 percent of the gross state product. Only four states (Kentucky, Mississippi, Hawaii, Illinois) are more lever- aged against their economies. S O U R C E : S T A N D A R D & P O O R ' S UNAMI SILVER S Connecticut's 12 6 3 9 10 8 2 4 11 7 1 5 UNAMI SILVER S Connecticut's RETIREMENT TIME B O MB H B J I L L U S T R A T I O N | C !

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