The use of the CRPTF’s investment pool for the OPEB Trust Fund was approved by the independent Investment Advisory Council of Treasurer Denise Nappier’s plan to formally designate the OPEB Trust Fund as a component of the CRPTF. This approval is one of a series of actions needed to ensure the growth of the trust fund’s assets, which represents a portion of prefunded future costs of retiree health benefits, Nappier said in an announcement.
“State officials and union leaders were wise to consent to the establishment of an irrevocable trust fund to better manage the state’s future OPEB costs and lessen the costs to the state budget. This, in turn, can help to reduce the staggering burden on Connecticut taxpayers in meeting the state’s single largest long-term unfunded liability. The good news is that the OPEB Trust Fund is at the starting gate, poised to achieve the highest possible risk-adjusted performance,” she stated.
Connecticut’s retiree health benefits plan has been funded on a pay-as-you-go basis, with benefits paid from current year general fund appropriations. Beginning In 2008, the state committed to partially prefund its future liability, but then deferred payments because of budget constraints until March of 2012.Under a revised 2011 agreement reached with the State Employees’ Bargaining Agent Coalition (SEBAC), the state will begin contributing to the OPEB Trust Fund in 2017 an amount equal to employee contributions.The state has been setting aside employee contributions for future health benefit costs since 2008 and covering current retiree benefits from the general fund.
The bulk of the trust fund assets, currently employee contributions, were initially invested in the Treasury’s Short-Term Investment Fund (STIF). These assets have now been transferred to CRPTF’s short duration bond fund consisting of securities with global diversification and maturities longer than money market securities like those held by STIF. Pending final arrangements for a longer investment horizon, the Treasurer’s Office plans to employ a long-term diversified investment strategy, including domestic and international stocks and bonds and alternative investments. For the 2012 calendar year, this bond fund returned 1.92%, versus 0.16% for STIF for the same period.
A key factor in determining the OPEB Trust Fund investment strategy is the state’s funding and spending policy, the statement said. As the trust fund’s investment horizon increases in length, so will its risk tolerance for higher return-seeking investments. “As much as I would like to move swiftly to position the OPEB Trust Fund to maximize return, we must take a measured approach to establishing a sound asset allocation plan,” Nappier commented. “For that, we need a clearer sense of this trust fund’s expected cash flows and the timing of disbursements. In the meantime, the CRPTF’s short duration bond fund is our best and only avenue for managing this money. To do otherwise could result in the reckless loss of the trust fund’s principal.”
The state’s funding and spending policy for the OPEB Trust is one of several features of the OPEB Trust Fund that need to be fully addressed before the assets can be deployed to appropriate long-term investment vehicles.In August of 2012, Treasurer Nappier advised state officials that a number of governance and other structural issues need to be clarified, such as the development of governance documents to comply with state and federal law, Internal Revenue Service (IRS) guidelines and Government Accounting Standards Board rules.A report released in August 2012 stated OPEB liabilities contribute approximately $600 billion to total debt for U.S. states (see “Unfunded Pension Liabilities Most of States’ Debt”).