The cost of providing retirement benefits to state employees will rise to more than half the cost of salary and wages this year, according to estimates by Comptroller Kevin Lembo.

The cost of these benefits, including pensions and health insurance for life, rose about 14 percent for the largest group of state employees since last year.

Lembo’s office each year estimates the value of fringe benefits so the state can properly account for the cost of its employees. The latest estimates are for fiscal year 2014, which began last month.

The increases have already forced the University of Connecticut to address a budget deficit.

Pension costs have two components: the future pension benefits an employee earns each year and the unpaid cost of old promises.

The state’s largest pension fund, the State Employee Retirement System, saw a small increase in the cost of paying for current promises and a larger increase in the cost of old promises.

By reducing the expected rate of return from 8.25 percent to 8 percent, actuaries are more realistically calculating the cost of pension benefits.

Although the new rate is a slight improvement over the old one, the state still has a long way to go. The federal government requires private sector employers to use much lower rates and economists generally agree that the discount rates used by government pensions are too high. A more accurate calculation would use a risk-free rate of return, closer to 4 percent.

For regular SERS employees, the cost of retirement benefits is about 55 percent of pay, up from 46 percent.

Three main factors contributed to the increase:

  • Poor market returns in fiscal year 2012;
  • The continued impact of the financial crisis because the state still hasn’t recognized all of its losses from the 2008 market downturn;
  • And changes to actuarial assumptions.

Changes to assumptions include the more accurate projections, plus another change with an even larger effect. Gov. Dannel Malloy eliminated the balloon payments scheduled to come when the state completes paying off its pension debt.

If the state pays into the state employee pension plan on schedule and meets its ambitious investment targets, it will have its debt to current and future retirees paid off by 2032.

Under previous plans, the state would have needed to make large balloon payments – final payments much larger than those made in other years – to reach this goal. Malloy changed the payment schedule to eliminate the large payments.

One group of SERS employees, those with hazardous-duty positions, have more generous pensions than other members. The cost of their retirement benefits rose from 49 to 59 percent.

Although the state pays the costs of providing pensions for all teachers in Connecticut, only 1.5 percent of teachers work for the state. For those teachers, the state calculates the total cost of their retirement benefits as 52 percent of pay.

Total costs of retirement benefits for judges are about 57 percent of pay, down slightly.

The only retirement program run by the state that costs less than half of pay is the Alternative Retirement Program. It costs 11 percent of pay, although that is probably understated because of the way the state accounts for retiree healthcare costs.