We all use state services and we are all invested in Connecticut's future. My family's investments are primarily in our home and jobs. Yours may include children in school, a parent in a nursing home, care for a disabled family member, living in a town that relies heavily on state funding, or the promise of a state pension. Whatever your family's investments in and hopes for Connecticut are, they will be affected by the information in Connecticut's recently released financial statements and actuarial reports.
In that spirit, be forewarned a budget "balanced" by borrowing and deferring expenses does not, in fact, balance. As of June 30, 2013, Connecticut's cumulative on- and off-balance sheet debt stood at $68.1 billion, or $18,939 for every man, woman, and child in the state. Budgets that truly balance don't borrow money to cover operating expenses.
So what are the components of Connecticut's debt? To whom have we promised all this money? According to financial reports posted to the comptroller's and Teachers' Retirement Board websites in late February, more than 97 percent is owed to the "Big Three": bondholders, unfunded state retiree health care and unfunded state retiree pensions. The benefits are contracted through three separate retirement packages given to state employees, teachers and judges. I will focus on unfunded retiree health care and pension benefits.
For decades, while businesses were required to responsibly fund their defined benefit pensions, governments were not held to the same standard. Some governments realized the necessity of properly funding their benefit promises. Connecticut's did not.
Unfunded retiree health care, known as other post-employment benefits, for state employees, teachers and judges is unfunded by $22.6 billion. Of that, $19.7 billion is the underfunded state employees' health care benefit.
Let's put this in context: A state employee and spouse are covered by that state employee's health care benefit. The value of the benefit for both comes to $325,500, more than enough to purchase a median- priced home in most Connecticut towns. The amount set aside to make that purchase, however, is only $1,200, enough to purchase a modest refrigerator. To underscore the magnitude of the debt, the amount owed under the state employees' contract is a bit more that the value of all of the taxable property in Stamford. The amount set aside to pay is 0.6 percent of the amount owed.
Unfunded retiree pensions: Connecticut state retirees, workers and their spouses have been promised pensions valued at $48.9 billion dollars. The amount set aside to pay that liability is $23.7 billion. Note that the unfunded pension liability is greater than that owed on retiree health care.
Who is affected? All of us. The United Nations defines sustainability as a "decent standard of living for everyone today without compromising the needs of future generations." With so much of future budgets promised to such a small segment of the population, Connecticut is clearly imperiling its future generations.
Future and current Connecticut state retirees who are depending on these benefits are also in peril. On June 30, 2013, total benefits were only 33 percent funded, down a full percentage point from the prior year. I'm not a betting woman, and yet I put the chances that the benefits will be paid as promised somewhere between slim and none.
While the problem is immense, defying satisfactory explanations, The Economist in its March 7 edition provided an excellent perspective:
"Plato's great worry about democracy, that citizens would '…live from day to day, indulging in the pleasures of the moment,' has proved prescient. Democratic governments got into the habit of running big structural deficits as a matter of course, borrowing to give voters what they wanted in the short term, while neglecting long-term investment …The financial crisis starkly exposed the unsustainability of such debt-financed democracy."
Fiscal sustainability is a component of any large enterprise and Connecticut is no exception. Governments throughout the country are acclimating to a new "post-recession normal." Decades of the borrowing habit have left our state at risk. Connecticut's new normal will depend to a large degree on how its citizens and leaders balance the competing needs of state retirees and ongoing state operations.
Julie McNeal is a certified public accountant and director of finance and operations at the Connecticut Society of CPAs, based in Rocky Hill.