According to the Segal Company in Farmington, taxpayers were on track to owe present and future retirees $31.2 billion in other post-employment benefits as of this year.

A draft report last month showed that number fell to $20 billion, largely because of changes in assumptions and participation in a new program that has accounting advantages over the previous method of delivering prescription drugs to retirees on Medicare.

One of the major assumption changes in the draft report was an increase in the discount rate from 4.5 percent to 5 percent.

In the final version of the report, the actuaries increased the discount rate again – at the state’s request – this time to 5.7 percent. This simple change of .7 percent reduces the stated cost of the benefits by $2.1 billion.

The discount rate is important because it puts a price on time. The higher your discount rate, the more you prefer to have money today over tomorrow.

Put another way, the discount rate is the amount of money you would give up to have a dollar owed to you next year paid today.

The state is increasing its discount rate because of accounting rules often criticized by financial economists that allow it to use a discount rate based on expected investment returns.

Financial economists say the discount rate should be much lower – specifically what is known as the risk-free rate – if the liability has to be paid.

Higher rates of return – and higher discount rates – imply taking on more risk to obtain such returns and shouldn’t be used for guaranteed payments, the argument goes.

Gov. M. Jodi Rell and the State Employees Bargaining Agent Coalition agreed in 2009 to start saving for OPEB costs in a trust fund.

Although the trust fund currently contains about $49.6 million – or one-four-hundredth the long-term healthcare liability – the state is counting on returns from investing this relatively tiny amount to justify increasing the discount rate.

The state expects to earn 8.25 percent on its investments in the trust. The actuaries determined 5.7 percent represents a blend between the 8.25 percent discount on liabilities with offsetting assets and 4.5 percent for other liabilities.

Private sector companies have to use lower discount rates. The Wall Street Journal recently reported that General Electric is using a 4.2 percent discount rate, while Boeing is using a 4.4 percent rate.

As recently as a year ago their discount rates were higher than 5 percent, but private companies are legally required to fully fund their pensions unlike state governments.

Before setting up the trust, the state paid only the cost of benefits incurred each year instead of the cost of the benefits promised. It still doesn’t pay the full cost of the benefits promised, but its annual contribution and the amount contributed by some state employees is greater than the amount being paid in benefits.

Announcing the completion of the report, Gov. Dannel Malloy and Comptroller Kevin Lembo celebrated its findings.

“Today’s announcement is further proof that the tough decisions we’re making are having a real impact on our state’s finances,” Malloy said. “By planning for the long term, we can make sure that future generations won’t find themselves in a situation where they have to choose between critically important services and obligations to state employees.”

“This future savings is extraordinary, resulting from partnership among state agencies and state unions in controlling costs, while maintaining quality services,” Lembo said. “This report reveals that creativity and collaboration, all accomplished in remarkably short time, will save us billions. This is a powerful incentive to continue these efforts to reduce costs for Connecticut.”

The joint release from Lembo and Malloy described the savings differently than actuaries did in their report.

Lembo and Malloy said the $2.12 billion reduction “is due to recently negotiated increases in employee and state contributions, which are expected to accumulate rapidly under this new arrangement.”

According to the actuaries,

A ten-year projection of the OPEB Trust Fund was completed to study whether the discount rate used to value plan obligations could be further increased. Based on our analysis presented in our memo dated May 10, 2012, the State decided to increase the interest rate to 5.7%, which lowered the obligation by an additional $2.12 billion.

Since the report was long overdue, the state had to use stale numbers in its Comprehensive Annual Financial Report, as it did for the two years before that, prompting auditors to mark the reports incomplete.

Under proposed new accounting rules, the state will soon have to add its retiree healthcare liability to its balance sheet instead of reporting it in footnotes.

According to the actuaries, recent retiree healthcare costs came in lower than expected allowing them to reduce future estimates.

The actuaries also changed the prediction for medical inflation from previous reports. At its peak difference from previous estimates three decades from now, the new inflation rate saves the state about 8.5 percent.

Lembo’s adoption of a new method of delivering Medicare prescription drug benefits has accounting advantages that allow the actuaries to use future federal subsidies to decrease the liability on Connecticut’s books.

The video is still worth watching. Taylor and the state board remained somewhat below the radar during the debate on education reform, but together they can make some changes even without the legislature.

During the second minute of the interview, Taylor compares having too many charter schools to having too many channels on TV.

“When I grew up there were three television networks, right. I am not sure we are really benefited by having however many television networks we have now, if we are trying to form a cohesive society,” he said. “And I think that’s an element of our school system.”

ChoiceMediaTV has another clip from the interview that focuses on the reform legislation.

Taylor’s biography and more information about the board is here.

According to the report, co-authored by former Yankee Institute intern Jordan King, the state Department of Revenue Services is seeking more than $3 million in back sales taxes from the company.

From the report:

States are becoming increasingly aggressive about expanding nexus standards beyond their borders as budgets get tighter and the desire to find new revenue increases. Moreover, the precedent thus far in these Scholastic cases suggests a bleak future for remote sellers seeking to do business across state lines.

According to Barro, because of Rhode Island’s lower per capita income, the state has higher taxes AND lower government spending than both its neighbors.

As of 2009, Rhode Island collected 10.1 percent of state GDP in taxes, outstripping Connecticut (9.9 percent) by a little and Massachusetts (8.9 percent) by a lot. But despite that, Rhode Island governments had only $4,638 in per capita tax revenue to work with, less than Massachusetts ($5,014) or Connecticut ($6,434).

Things must be pretty bad next door if they are looking to Hartford for fiscal rescue. Apparently it is the cities and towns in Rhode Island that are heading for a fiscal cliff.

More from Barro:

Last year, the New York Times profiled fiscally troubled Rhode Island as “Greece on the Narragansett.” Like Greece, Rhode Island faces problems with runaway public sector liabilities, particularly for pensions and retiree health care, that may exceed governments’ ability to service them.

A major pension reform last fall significantly improved the state’s finances, but municipal governments, already more troubled than the state, still await a fix. Providence is talking about bankruptcy, and other cities, like Woonsocket and Cranston, are tottering; the small city of Central Falls is already there.

But Rhode Island has another similarity to Greece: a lot of its problems could be fixed through fiscal union with its wealthier, more productive neighbors.

Within New England, Rhode Island faces a major structural disadvantage. Rhode Island’s per capita income in 2010 was $27,700. That’s actually slightly above the national average, but it’s far below Massachusetts ($33,200) and Connecticut ($35,100).

The threat of bankruptcy should put persistent whining from the Connecticut municipal lobby into context.

Read the rest here.

Update: This post has been corrected to properly spell Josh Barro’s name.

From the Day:

If Connecticut is open for business, Bob Romano wants to know who turned out the lights.

Romano, owner of Warwick, R.I.-based Coutu Brothers Movers, applied several months ago to expand his current three-truck moving operation into North Stonington. By his estimation, Romano spent more than $6,000 doing everything the state Department of Transportation told him to do: leasing a convenient location on Norwich-Westerly Road, paying his business-entity fee and even making repairs to the office space he intended to occupy.

Then, last week, a DOT hearing officer issued what Romano saw as a stunning denial of his application, saying the business owner had not proved there was a need for his services and noting that two other moving companies in the region had claimed new competition would hurt their businesses.

“You’d think they’d be looking for new businesses,” Romano said. “How can they not welcome a new business in this climate?”

Read the whole story here.

Troy Senik at Public Sector Inc. says double-dipping is “one of the many pathologies afflicting the public pension system in California.”

This actually has happened here in Connecticut.

Last year, Community College Chancellor Marc Herzog retired from his $232,874-a-year job so that he could get paid an annual rate of $174,661.20 to do the same job on an interim basis and his $168,000 pension, according to the Hartford Courant.

It’s unclear how often this is happening at the local level in Connecticut, but it’s certainly possible. Tips are appreciated!

Each Friday, Raising Hale will highlight one crazy thing from the latest headlines that could happen in Connecticut. To suggest a topic, contact Zach.

It could happen here – Archive:

Blog police, Part II

Blog police, Part I

Doubled taxes

State employees planning your retirement

Rick Miller, chairman of OMERS, shared his fund's experience investing in infrastructure. Photo courtesy of OMERS.

New York City – Officials from state and local pension funds from around the country heard about alternative investments at their trade group’s annual meeting, including infrastructure and small companies in developing countries.

The National Conference on Public Employee Retirement Systems hosted a panel on investing in infrastructure Monday, but audience members asked more than one question critical of the idea.

Sonia Axter, managing director of infrastructure investments for Ullico, said infrastructure includes many different kinds of investments, including utilities, bridges, rail projects, schools and hospitals. Ullico, the company Axter works for, is owned by unions.

She said infrastructure investments are often done using P3 agreements or public-private partnerships. She said some people talk about P4s, adding pensions to the list.

Axter said American infrastructure is deteriorating and needs new investments, tying the topic to the conference’s theme, “rebuilding America.”

She said infrastructure investments have characteristics attractive to pension funds, like their long maturities and predictable cash flows.

“The need is so great,” Axter said, pension funds are opening up to infrastructure investments.

Rick Miller, chairman of the Ontario Municipal Retirement System, gave some examples of OMERS success investing in infrastructure “trophy assets.”

Miller said the infrastructure asset class “basically didn’t exist” in 1997 when OMERS first invested.

He said his $55 billion fund was able to buy a 25 percent stake in an $8 billion infrastructure joint venture with the Ontario teacher’s pension fund and a private investor.

Miller said his fund sees rates of return of about 10 percent on infrastructure investments. He said infrastructure investments feature:

• Returns between fixed income and equities
• Predictable cash flows
• Low volatility
• Increased charges/service fees which keep up with inflation
• Long-term cash flow

More than one questioner asked about infrastructure investments leading to lost jobs for public employees who belong to their pension funds.

Michael Musuraca, a former union official now with Blue Wolf Capital Management, advised against privatizing infrastructure just to save money.

He said pensions that invest “have the ability to call the tune” when it comes to labor policies.

Miller said his fund won a bid to take over a hospital, but declined to proceed when the local government asked to void the existing collective bargaining agreement.

“We haven’t eliminated jobs,” he said. “We’ve added jobs.”

Miller said funds need to consider political risk, geographic risk and question all the assumptions used in projecting the returns of infrastructure investments. Musuraca said pension funds should look to diversify by sharing projects with other plans.

At another panel on new investment ideas, Stephen Derkash of UBS Global Asset Management and Stephanie Braming of William Blair & Company urged pension funds to invest in small companies in developing countries, an area known as emerging market small cap stocks, to take advantage of the growing middle class abroad.

Small cap – short for capitalization – stocks are defined as companies with market values below $5 billion.

Braming said funds should consider having about 35 percent of equity investments in international stocks. Of that amount, she said funds should put 35 percent into emerging market small cap companies.

Derkash said Odontoprev is an attractive Brazilian company because employers are adding its dental insurance products to compete in tightening labor markets.

Braming gave two examples of successful companies, Life Healthcare and Jubilant Foodworks. Life Healthcare is a large hospital system in South Africa. Jubilant is the Domino’s Pizza franchisee in India and it will soon begin to franchise Dunkin’ Donuts there, too.

New York City Comptroller John Liu

New York City – Government employees who oversee taxpayer-funded pension systems across North America heard fiery speeches Monday morning calling for battle against political enemies in defense of guaranteed retirement benefits.

“There is an extreme push to do away with defined-benefit plans. We’re being attacked,” said Pat McElligott, president of the National Conference on Public Employee Retirement Systems. “The only way we can stop this attack, is to start attacking them.”

McElligott, a former firefighter and representative of the Washington State pension fund, went off-script during his last speech opening a NCPERS conference as president. His successor will be elected during the five-day meeting.

He reminded the room full of public employees that they had made a decision to serve the public instead of making millions.

“What we have now is not something that was just given to us. It’s not overgenerous. It’s what we worked for to achieve retirement security,” McElligott said.

NCPERS is a trade association for more than 550 pension funds in the U.S. and Canada.

“The traditional pension – also known as the defined benefit retirement plan – has been, as just mentioned, under attack in this country since at least 1980,” New York City Comptroller John Liu said in the Monday morning keynote address.

“In the private sector, the percentage of workers participating in a traditional plan has plummeted from about 88 percent in 1975 to 24 percent in 2008,” Liu said. “More than 90 percent of public sector workers still have a traditional retirement plan. We have to make sure that continues.”

“Not only for the benefit of public employees. But for all workers,” he said.

Liu is New York City’s chief fiscal officer. In his role he oversees the city’s five pension funds.

McElligott said public employees do have friends in government, “but every so often our friends need to be reeducated.”

“I come from the state of Washington. We’re the number three pension in the country. We’re overfunded in most of our funds and we still have our friends – we have a Democratic governor, house and senate – and they’re still pushing defined contributions on us,” McElligott said. “This is just unheard of.”

“They lie to us and then they come back and ask us for our help again,” he said.

“When I talk about this issue, which I do pretty often, I like to compare it to a group of people standing in the rain, waiting for a bus,” Liu said. “The public sector workers are like the one person in the group that has an umbrella. Everybody else on the street corner is looking at that umbrella and getting very jealous.”

“We have a name for that in the retirement field,” he said. “We call it ‘pension envy.’”

“Last year the governor of Wisconsin took advantage of pension envy and went after public sector workers,” Liu said. “He exploited the resentment created by the worst economic crisis since the Great Depression and set private sector workers against public sector workers.”

“But the pensions of public sector workers are not why private sector workers are out there in the rain, getting soaked,” he said.

“But if only one person has an umbrella – and in this case, we’re talking about public-sector workers who have traditional pensions – does it make sense to take the umbrella away from that one person who has it? Or does it make sense to try to get an umbrella to everyone? I think the answer is obvious,” Liu said.

“We need to be motivated. We are public employees. We’re the ones filling potholes. We’re the ones driving the kids to school. We’re protecting their home,” McElligott said. “They think we’re overpaid until all of the sudden the electricity goes out and they’ve got some guy sitting on a pole in 20-degree weather trying to recharge that line so they can get warmth in their house. They don’t mind us then.”

“We need to get active. We need to get out there,” McElligott said.

“The way that pensions get discussed today is remarkably one-sided and short-sighted. It seems to be all about cost, with no consideration of need,” Liu said. “Taking pensions away from those who have them is not the answer.”

“However, there are ways in which public-employee pensions can be better managed,” Liu said.

He said the city still manages pensions in much the same way as it did 70 years ago.

He said his proposal of a centralized investment authority for all five New York City pension plans and other reforms will save $30 billion over 30 years. (In 2013, the city will spend $8 billion on its five pension funds, according to Liu.)

“And this could be done without reducing anybody’s benefits.”

Liu also talked about research done as part of his office’s Retirement Security NYC project.

• The city’s pension costs are projected to rise through 2060, but starting in 2016 they will begin to fall as a percentage of total city spending.
• City pension contributions grew from $1.2 billion in 2001 to $7.7 billion in 2010 because of poor market performance.

Liu also said the city’s funds will reduce their assumed rate of return from 8 percent to 7. Financial economists criticize pension funds for using high discount rates which distort the true cost of retirement benefits.

Correction: A previous version of this article misidentified the National Conference on Public Employee Retirement Systems.

Following widespread criticism from online pundits and free speech advocates, California’s political watchdog is backing away from a plan to require news websites and bloggers to disclose payments received from campaigns and political committees.

Ann Ravel, chairwoman of the Fair Political Practices Commission, announced earlier this month her intention to pursue regulations of bloggers that are funded to advocate for or against candidates. “Ultimately I’d like to see the FPPC require it,” Ravel declared at an April 19 campaign finance conference in Sacramento, the Orange County Register reported. After listening to bloggers’ concerns, Ravel now says that that she will be looking for other ways to inform the public about any potentially biased online sources.

…

The state’s top campaign regulator, who spoke to us by phone from Brazil, agreed that the Internet age changes how political information is shared and campaigns are regulated. However, she steadfastly defended the agency’s authority to regulate online political activities designed to influence California elections, even if sites are physically based out of the state.

“I believe we do have the power to go out of state,” Ravel said of online political activity intended to influence the California electorate. “If there is money being spent, no matter where that money comes from, we have the power to regulate that.”

Read Hrabe’s original article here.

Each Friday, Raising Hale will highlight one crazy thing from the latest headlines that could happen in Connecticut. To suggest a topic, contact Zach.

It could happen here – Archive:

Blog police, Part I

Doubled taxes

State employees planning your retirement

Deficit gimmicks

Carol Carson, executive director of OSE, had the communications and legislative affairs manager at the State Elections Enforcement Commission – her friend – transferred to work at her agency in an agreement finalized in March.

During an interview with Raising Hale last month Carson said she consulted her agency’s legal division and disclosed her friendship to members of the Citizen’s Ethics Advisory Board, which oversees her agency.

Barbara Housen, general counsel at OSE, responded to a Freedom of Information Act request from Raising Hale saying there are no records of the advice given to Carson.

Housen and Carson subsequently confirmed that Housen herself gave the advice to Carson, her superior, orally beginning last October.

Since the advice was given orally and was not recorded, no documents could be disclosed in response to the records request.

Carson said OSE is not required to document all advice given.

Housen said when members of the public call in “we would typically try to keep some kind of informal log here.”

She said the log serves two purposes, tracking internal productivity and clearing up confusion if someone later misrepresents the advice.

Housen said OSE gives advice more than 1,000 times a year.

“I sought advice and acted consistently with the advice provided,” Carson said.

She said she had “several conversations beginning in October” that confirmed her “understanding that the Code of Ethics does not prohibit such action.”

“Ms. Carson disclosed fully to the board, myself and the OSE staff that she was acquainted with and friendly with Ms. Nicolescu having both worked on legislation during previous legislative sessions,” Housen said. “She also shared the qualifications of Ms. Nicolescu.”

“We discussed the relevance and application of the Code of Ethics generally and it was, and is, the opinion of the Legal Division that Ms. Carson’s actions do not violate any provision of the Code of Ethics,” Housen said.

Carson has been lobbying the legislature this session – with just days remaining before constitutionally-required adjournment – to make the position of her friend, Nancy Nicolescu, permanent within the agency.

Although part of Nicolescu’s job description is legislative liaison, or lobbying on behalf of the agency, Carson said she alone, instead of Nicolescu, has been lobbying for the change.

Carson earned $118,759 in 2010, according to CTSunlight.org. Nicolescu earned $86,156.

Under the state ethics laws, employees of OSE are held to a higher standard than all other state employees. A group of provisions, 1-80(h), apply only to employees enforcing the ethics code.

The statute says,

“The members and employees of the Citizen’s Ethics Advisory Board and the Office of State Ethics shall adhere to the following code of ethics under which the members and employees shall: (1) Observe high standards of conduct so that the integrity and independence of the Citizen’s Ethics Advisory Board and the Office of State Ethics may be preserved; (2) respect and comply with the law and conduct themselves at all times in a manner which promotes public confidence in the integrity and impartiality of the board and the Office of State Ethics…”

In 2009, OSE settled with a former ethics official, Maureen Duggan, for failing to behave in a way that “promotes public confidence in the integrity” of the agency and fined her $1,000 for that and one other violation.

Housen said Carson’s actions “do not violate any provisions of the Code of Ethics” and the Duggan case is “inapplicable.”