By Edward Zelinsky
Connecticut’s new governor, Dannel P. Malloy, has appointed six sitting members of the Nutmeg State’s General Assembly to positions in the executive branch. These gubernatorial appointments have engendered a fair amount of discussion since special elections will be required to fill the legislative vacancies resulting from these appointments.
There has, however, been no public discussion of the pension implications of these appointments. Under Connecticut’s retirement plans for government employees, relatively brief service in executive positions results in significant spikes in legislators’ state pensions. This phenomenon is not unique to Connecticut.
The issue of legislators’ pension spikes suggests how difficult it will be for state governments to curb their unruly pension costs. Legislators’ pension spikes are the broken windows of the state pension crisis, emblems of underlying fiscal disorder.
While the details are complex, the basic arithmetic is not: Connecticut state employees (including legislators) are covered by contributory defined benefit pension plans. These plans provide “final average” pensions, meaning that a participant’s pension is based on the highest salary he earns during his last three years of state employment.
To take a simplified, but substantively accurate, example, suppose that a Connecticut legislator serves for twenty years at a constant salary of $30,000 per year. Suppose further that the state’s defined benefit pension plan pays this legislator a retirement annuity equal to his final salary multiplied by one percent for each of his years of state service. In this case, the legislator is entitled to a retirement annuity of $6,000 yearly because $30,000 X 20% = $6,000.
Now suppose that this same individual spends seventeen years in the General Assembly and then works in the executive branch for the last three years of his state career at an annual salary of $100,000. Under the retirement plan’s final average formula, the legislator’s final average salary spikes and thus so does his pension. In this simplified example, the three years of full-time executive branch employment rachet the former legislator’s state pension from $6,000 annually to $20,000 yearly because $100,000 x 20% = $20,000.
In effect, the former legislator’s last three years of full-time executive service at a salary of $100,000 retroactively balloon the value of his first seventeen years of relatively low-paid, part-time legislative service. The result is a tripling of the former legislator’s pension even though he only works at the higher salary for the last three of twenty years in state government. The legislator gets the same pension as does a Connecticut state employee who, over his twenty year career, consistently earned a full-time salary of $100,000.
Another way of characterizing this pension spike is that the governor bestows upon this former legislator a signing bonus for joining the executive branch of state government. Since he works for the governor at the higher executive salary, the former legislator’s state pension increases more than three-fold during his relatively short executive branch service.
Quantifying this signing bonus as a lump sum involves many details and qualifications, such as assumed interest rates, life expectancies, and other actuarial variables. However, under conservative assumptions, in this simplified example, the present value of the former legislator’s increased pension is at least several hundred thousand dollars. Frequently, in practice, the amounts involved are even more.
If Governor Malloy had granted each of his appointees from the General Assembly a $200,000 check as a signing bonus, the public outcry would have been overwhelming. That, however, is effectively what the Governor has done through the legislators’ pension spikes.
I have no doubt that all six of Governor Malloy’s appointees are competent and honorable people. Nevertheless, no matter how solid their personal and professional credentials, these legislators’ pension spikes are troubling.
Connecticut is not unique nor is the phenomenon of legislators’ pension spikes limited to Democrats. Republicans do the same thing when they can.
A defender of this practice might retort that, in the grand scheme of things, legislators’ pension spikes represent relatively small potatoes. Connecticut’s (and other states’) defined benefit plans are underfunded by billions of dollars. Why concern ourselves with the comparatively small amounts involved in legislators’ pension spikes?
Because such favoritism for legislators is the broken window of the state pension crisis. Over a generation ago, James Q. Wilson and George L. Kelling famously observed that relatively minor forms of public disorder have disproportionate influence because they signal an environment in which civic authority is absent.
So too, legislators’ pension spikes signal a business-as-usual approach to state pensions, the lackadaisical approach which has brought many states, like Connecticut, to the brink of financial collapse. How can a Governor impose fiscal discipline on state pensions when among his first acts in office are appointments which manipulate the pensions to provide windfalls to his appointees?
Confronting the states’ unfunded pension liabilities will be difficult for state employees and state taxpayers alike. In the initial stages of this confrontation, governors and legislators will take relatively easy measures focused on new employees in the hope that such measures will suffice to solve the states’ fiscal quandaries, e.g., switching new state employees to defined contribution plans, increasing their retirement ages and reducing new employees’ future benefit accruals.
In Massachusetts, for example, Governor Deval Patrick and legislative leaders have agreed that newly-hired state employees should have later retirement ages for pension purposes. Utah and Illinois have switched all new public employees to 401(k) plans. New York Mayor Michael Bloomberg proposes that the pension retirement age be increased for the city’s new nonuniformed employees and has also expressed interest in putting new employees into 401(k) arrangements.
The real difficulties will start when it becomes clear (as it will quickly) that these kinds of initial measures aimed at new public employees will not be enough to control public pension costs. At that point, governors will need to call for real sacrifice. However, legislators’ pension spikes, like those given to Governor Malloy’s six appointees in Connecticut, undermine the governor’s authority to call for meaningful change to public employees’ pensions. Moreover, legislators who might benefit from pension spikes in the future have a self-interest in maintaining the pension status quo.
If Governor Malloy and his Republican and Democratic peers are serious about addressing their states’ pension-driven fiscal crises, they must start by mending the broken windows of their state pension systems. Legislators’ pension spikes must go.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.