Aug. 24—NEW LONDON — After decades of treading water with its pension planning, the city in the last several years has made incremental, but steady progress in ensuring it has the funds available to meet its long-term obligations.
As of July 2022, New London boasted $41.6 million in net pension liability ― money owed to the 173 active pensioners enrolled in fixed benefits plans ― and $32.8 million in pension assets, or those invested funds set aside for future pension payments.
Those two figures leaves the city with a 78.8% funded ratio, up from 71.2% in 2018.
"We're in good shape, but not golden," city Finance Director David McBride said.
City employee pension data obtained through a public records request shows annual retiree payouts ranging from $4,733 paid to an employee who retired in 1994, to $93,666 paid annually to former Finance Director Donald E. Gray Jr., who left his job in 2003. Gray, however, returned to the city's payroll in 2015 to help fix the city's finances. That return, at a higher salary, bumped up his final pension payment amount.
Eschewing a kick-the-can approach
Until about 10 years ago, the city, like other municipalities across Connecticut ― and even the state itself ― had a seat-of-the-pants attitude when it came to meeting its pension obligations.
At best, that meant coming up with pension payments as they became due each year. In worst-case scenarios, pension contributions in some towns and cities were decreased or pushed off, though city Treasurer Donna Rinehart said the New London always funded its pension plans.
McBride said the city made significant changes to how it addresses its pension obligations in 2013, not long after a perilous stretch marked by an exhausted fund balance, massive deficits and a flirtation with municipal bankruptcy.
Over the next several years, the city passed a resolution requiring 1% annual growth in the city's fund balance, non-essential overtime was reviewed and permit fees increased. Those changes, along with a rise in grand-list revenue, moved the city into the black.
But the city's outstanding pension liability still needed attention.
The state, dismayed at the kick-the-can approach to municipal pension planning, required municipalities in 2013 to begin formally documenting their liabilities, giving officials a clear idea of what they owed and how they could reach the ideal goal of funding 100% of their pensions.
Kevin McNabola, past president of the Government Finance Officers Association of Connecticut, said towns were essentially encouraged to abide by updated generally accepted accounting principles.
"Those principles laid out what is expected and ensured cities and towns were actually tracking their asset portfolios and that they were being fully funded," McNabola said.
Striving for 100%
A second legislative change adopted in 2015 involved using "actuarially determined employer contributions," or ADEC, standards that are updated every two years.
Those standards meant for the first time many Connecticut municipalities, including New London, knew how much they needed to set aside each year to meet their obligations and also how much additional funding the city needed to fully fund its pension debt.
"That laid out the best way to begin paying off the total pension liability, not just make those yearly payments that we owed," McBride said.
He said the city began incrementally adding more funding each year toward paying off its pension debt and started fully funding those requirements beginning in 2020.
George Rafael, associate deputy director at the Connecticut Conference of Municipalities, said while a 100% funded pension liability is the "ideal," New London's ratio is pretty good.
"It's higher than a lot of other municipalities and a better percentage than the state is doing with its plans," he said.
McNabola said municipalities are considered in good shape if their pensions are funded at 80% or higher, though he said New London's percentage is higher than those of many other cities.
"If you have a city that's only funding their plans by 42%, they're having to put more and more in to catch up," he said. "A 100% funded pension plan gives the ability to pay out those pensions in total."
East Lyme boasted a 103% pension liability ratio as of 2023, said Finance Director Kevin Gervais Jr. Despite that high figure, he said the town will continue putting money toward its pension plans annually to account for future market volatility.
"There's nothing that says in 10 years, we're not at 80% funded," Gervais said. "So, we still fund the plans and keep building to keep close to that fully funded ratio."
The City of Norwich in February 2022 fully funded its unfunded pension obligation by bonding the entire estimated $145 million amount. The move is expected to save the city an estimated $43 million over 30 years by taking advantage of low interest rates.
There's no firm timeline on when New London will reach that 100% pay-off standard.
"It's contingent on a host of factors," McBride said. "If plan participants fall off the pension rolls due to earlier than anticipated death, or interest rates go up, our obligation drops. But if the stock market dips 15% three years in a row, it'll take us longer."
Paying down debt, a year at a time
To meet its current obligations, and pay down its pension liability, the city for the last six years has used ADEC formulas to decide how much pension funding to set aside in its annual budget.
McBride said the difference in those yearly figures ― set by actuaries ― varies depending on how well the city's investments did and the number of pensioners in the program.
The city administers two single-employer pension plans, contributory and non-contributory, both closed to new employees. A contributory plan requires an employee to contribute to a retirement plan, while a non-contributory plan is paid for entirely by an employer.
As of 2022, the city pension plans included 112 city workers, 53 Board of Education employees ― custodians, unaffiliated and secretarial workers ― and eight workers who were delegated as water company employees before the city took over that work.
New city employees are offered entry into a 401(a) plan, in place for at least the last 30 years, in which worker contributions are matched immediately by the city up to 9% but does not require the city to keep paying in after a worker's retirement.
Another retirement program, the "pay-as-you-go" plan, which replaced the closed non-contributory program, has 21 enrollees and cost the city $111,000 to fund last year.
Certified teachers are eligible for enrollment in state's Teachers' Retirement Fund, which is funded solely through employee and state contributions. Workers contribute 8.25% of their annual salaries to the program and no municipal or Board of Education funding is used to fund teacher pensions.
Robert Funk, finance director for the New London school district, said the state contributed approximately $7.9 million to New London teacher pensions that covered 338 certified teachers as of June 2024.
As of June 30, 2023, there were 248 retired New London teachers receiving monthly pensions, according to documents received through a public records request to the Connecticut Teachers' Retirement Board, which oversees the pension plan.
The monthly pension payments ranged from $729.75 to $10,906 earned by the district's former director of pupil personnel services, George Turano, who was employed from 1979 to 1992.
City's bond rating upgraded
Fitch and other credit rating agencies, like S&P Global Ratings, take into account a municipality's pension obligations when assigning a bond rating, those grades that assess a city's financial health and can translate to lower borrowing interest rates.
In 2024, Fitch upgraded New London's bond rating to "AA." In 2022, Fitch and S&P both enhanced the city's bond rating to A+. The investment ratings system ranges from the highest, AAA, which denotes the lowest expectation of default risk, to CCC-, which represents the possibility of a default.
Though generally positive, Fitch analysts said their assessment was "somewhat tempered" by the city's practice of making pay-as-you-go contributions to its closed non-contributory plan.
"But plan liabilities are modest," Fitch wrote.
In rendering its grade, S&P analysts noted the city achieved 100% of its annual pension contributions in 2020 and 2021.
"We do not view New London's retirement obligations as a significant budgetary pressure," S&P analysts wrote in a 2022 rating overview.
Pensions for police, firefighters, public works
In addition to its own pension obligations, the city must also kick in millions of dollars each year toward the Connecticut Municipal Employees Retirement System (CMERS) plan, which, for fiscal year 2025, will cover 65 police employees, 68 firefighters and 72 public works employees in New London.
Mayor Michael Passero, a retired city firefighter, is covered under the CMERS program. His tenure as a mayor will also be covered under the state retirement program through an elected official provision in which he continues to contribute to the state plan. Passero does not earn a city pension.
CMERS is a public pension plan administered by the state. Municipalities may designate which departments, including elective officers, are covered under the plan. This designation may be the result of a resolution or a collective bargaining agreement.
McBride said a municipality's decision to join CMERS is an individual one that typically involves contract negotiations with unions and, in New London, was the result of a City Council resolution.
"Not all cities are enrolled in CMERS, but those that aren't need to offer a comparable plan," he said.
The 107 municipalities participating in CMERS make annual contributions at rates set by the State Retirement Commission to cover the liabilities of the system not met by employee contributions. The municipalities also contribute toward the administrative costs of the system.
CMERS pension debt ballooned from $332 million to $1.3 billion from 2016 to 2023, according to a Connecticut Insider Investigation report. Some portions of the CMERS plan, including its cost of living and long-term debt refinancing aspects, were recently modified as cost-saving measures.
Rinehart said the state every spring sends the city a new contribution rate for CMERS. The city applies that rate to an employee's pay and overtime earnings and sends monthly payments to the state, which accumulate until the employee retires.
"We have no say on what that contribution rate is," Rinehart said.
In 2023, the city paid $3.5 million into the CMERS program. The average yearly benefit to a CMERS enrollee is calculated based on their three highest paid years of service, according to the Connecticut Office of the state comptroller.
McBride said the city's CMERS obligation varies slightly each year but hovers around 26% of police and firefighter earnings and 16.6% for public works employees.
Rinehart said the city does not retain financial information on employees enrolled in CMERS after they retire.
According to data received by the Office of the state comptroller through a Freedom of Information request, 62 former New London police officers, 30 former firefighters and 23 former public works employees are receiving a CMERS pension.
The highest yearly pensions range from $8,115 for a former city worker to $144,240 earned by former police Officer James Suarez.
Avoiding the worst-case scenario
In 2011, Central Falls, R.I., the Ocean State's smallest town, declared bankruptcy. At the time, the town had $16 million in revenues, but also $80 million in pension and health care benefits deficits, according to the Pew Research Center, after it "grossly underfunded" its pension plan.
The Pew center noted 60% of municipal workers took advantage of the town's generous pension offering, which the town failed to make payments on between 2009 and 2011.
The city eventually emerged from state receivership.
Massive debt in its employee pension plan led the Philadelphia-adjacent city of Chester, Pa., to file for bankruptcy protection in 2022.
Bloomberg reported the city was saddled with as much as $500 million in debt and held assets worth less than $50 million, according to court papers. It reported an unfunded pension liability of more than $100 million as its biggest single unsecured debt.
"Faced with budget deficits, Chester shortchanged its pension funds, sinking deeper into the hole," the financial news organization reported. "The problem was magnified by miscalculations that allowed police officers to receive benefits based on their final year's earnings instead of the last three, according to the receiver's office."
The bankruptcy case is still proceeding.
j.penney@theday.com
New London city pension plan contributions by the numbers
2021: $981,000
2022: $1.4 million
2023: $1.4 million
2024: $1.2 million
*The figures include contributions for municipal enrollees, some Board of Education workers and a small number of former water company employees. Not included are certified teachers, police and firefighters and public works employees, who are covered under their own pension plans.
