Hamden Eyes COLA Recovery Plans

Between the early 1990s and now, Hamden paid its pensioners about $12 million more than it was supposed to, a new report from the town’s pension actuaries shows.

With that report in hand, the town now has a few options on the table for recouping those overpayments and saving millions of dollars.

The Hamden Employees Retirement Board examined that report, prepared by Segal Consulting, at a special meeting this past Wednesday. It detailed the amount of the town’s overpayments, and gave a few options the town has to recoup them. Some options would have less of an impact on pensioners, and could save the town a moderate amount of money. Other, harsher options could save tens of millions over the next decade, but would mean significant reductions to some pension incomes.

In the 1990s and 2000s, Hamden paid its pensioners too much in cost of living adjustments (COLAs). A COLA is a small percentage added to pensioners’ benefits each year to account for the rising cost of living due to inflation.

For most of its history, Hamden has paid its retired employees their pensions from a town pension plan. That plan closed to new entrants in 2006 and 2007, and the town switched all new hires over to the state-run Connecticut Municipal Employees Retirement System (CMERS). But the town still has hundreds of retirees and future retirees hired before 2006 that it must pay out of its own plan, and still has about $300 million of unfunded pension liabilities to pay off.

Hamden’s pension plan is supposed to pay pensioners COLAs that match the Consumer Price Index (CPI, one measure of inflation) up to 3 percent. That is, in years when the CPI is below 3 percent, pensioners’ COLAs are supposed to match the CPI, and when the CPI is above 3 percent, pensioners get 3 percent COLAs.

For much of the 1970s and 1980s, the CPI was well above 3 percent. That meant that each year, pensioners got 3 percent COLAs. Starting in 1993, the CPI has consistently remained below 3 percent. Yet instead of paying pensioners’ COLAs that matched the CPI, the town continued to pay them 3 percent COLAs.

Somehow, the mistake went unnoticed and unchanged until 2013, when then-Mayor Scott Jackson noticed it while working on a pension obligation bond that would keep the town afloat despite its crushing pension liabilities. He corrected the mistake. Since then, pensioners have received COLAs that match the CPI, which has remained below 3 percent.

Read more about the history of Hamden’s COLA overpayments here.

Now Hamden faces a projected deficit in the current fiscal year of somewhere near $10 million, or larger, and enormous uncertainty in the next fiscal year. Officials are looking for savings wherever they can find them, and correcting Hamden’s COLA mistake could save the town millions.

But doing so would require taking givebacks from pensioners by either freezing or reducing COLAs or even reducing benefit payments. The more the town is able to save, the more invasive the strategy for retirees. And the longer Hamden waits, the less money it can recuperate. 

“We have a responsibility to take action to eliminate continued overpayments that put stress on our Hamden Pension Plan,” Mayor Curt Leng, who chairs the retirement board, wrote to the Independent. ​“Doing this in a manner that causes the least harm to retirees would be my hope. The action of correcting what and providing what was earned properly will reduce long-term obligations by millions.”

Freeze, Reduce, Recoup?

According to the Segal report, 620 people, both retirees and the spouses of dead retirees, were overpaid and are still receiving payments. Most of those retired before 2012. 110 of them retired after 2012, and were still overpaid because the CPI dipped below 0, but they did not get negative COLAs to reflect the negative CPI.

In total, the town has overpaid living retirees by about $12.3 million. The report does not include overpayments to deceased retirees. If one accounts for interest and applies a rate of 4 percent to those overpayments, that would bring the total to $16.5 million that Hamden could recoup.

The report breaks down recoupment into two parts. First, there is reducing current benefits to what they should be under the plan’s terms.

In 2013, the town started paying pensioners COLAs that matched the CPI instead of a flat 3 percent, but COLA increases were based on pensioners’ benefits in the year prior. Those benefits were already inflated because of years of giving 3 percent flat COLAs.

One option for short-term savings would be to reduce pension benefits to what they would be if the plan had been administered correctly all along. Doing so would have a different effect on different pensioners, depending on when they retired.

The report includes a chart that shows the average reduction for pensioners in each retirement year since 1981. For some retirees, reducing benefits to what they should be under plan terms would have a relatively small impact. For retirees in 1983, for instance, they would only receive a 1.74 percent reduction, which would mean only about $20 off their monthly benefit. For others, it could be much more dramatic. Those who retired in 1982 would see their benefits reduce by about 11 percent. That would mean an average $118 reduction to their monthly benefits.

Those who retired in the 1990s would also see pretty hefty benefit reductions — around 8 or 9 percent for most retirement years that decade. Since benefits averaged much higher for those years than in the 1980s, that would mean $200-$300 off of monthly benefits for many retirees.

If the town were to reduce benefits immediately for all pensioners to what they should be if the town had always paid them correctly, Hamden could save $640,000 in the next fiscal year on its payment into the pension plan. It would continue to save for the remainder of the plan’s existence, even if the town did not try to recoup past overpayments as well.

Each year, actuaries determine an amount the town must pay into its pension to reach full funding after a set 30-year period, called the actuarially required contribution (ARC). In the next fiscal year, ARC is calculated at $23.2 million, and could be reduced to $22.6 million.

The town could opt to simply reduce benefits to what they should be under the plan’s terms, and not worry about recouping the $12 million of overpayments. Or, it could try to get that money back.

The report outlines a few different options for doing so.

“There are many solutions, but every solution has its pluses and minuses,” said board attorney Marc Wallman in the meeting.

Under the most stringent path Segal outlined, the town would reduce benefits to what they should be under plan terms immediately, and then keep them there, without giving any COLAs, until the town has recovered the overpayments. Once the overpayment has been recouped, the town would then bump the pensioner’s benefit up to what it would be if they had been given COLAs in the period in which they were frozen.

That plan would save the town a significant chunk of money, especially in the 2 – 15-year range. In 2026, for example, benefit payments are projected to hit around $37 million without any action. Under the full immediate reduction and full recoupment scenario, the town would pay a little over $34 million. From 2023 to 2028, annual savings would top $2 million.

The plan would reduce the town’s total pension liabilities by about $17 million, both because of the reduction in overall benefits to bring benefit levels back to what they should be under the plan, and because of additional savings from recoupment. The town could reduce its ARC in the next fiscal year by $1.2 million, to a little over $22 million.

That plan, however, would have a significant impact on pensioners. Retirees would see immediate reductions to their benefits, sometimes to the tune of hundreds of dollars a month, and then no increases for years — in some cases, for as long as 25 years.

The report also outlines a number of other less harsh recoupment strategies. The least extreme would not reduce benefits now, but would simply freeze them, giving no COLAs until all overpayments have been recovered. Of all the scenarios presented, it would take the longest. For pensioners of most retirement years since 1981, it would take over 10 years of no COLAs to recoup all the overpayments. For some who retired in 1993, it would take 32 years.

It would also save the least in the short-term. Starting in 2028, it would catch up though the total savings would still be lower than any of the other full recoupment scenarios. It would reduce total long-term pension liabilities by about $14 million.

As pension board member Henry Dove pointed out Wednesday, the longer the recoupment process takes, the more pensioners will die, eliminating the possibility of further recoupment unless the town is willing to go after people’s estates. Segal consultant Deborah Brigham, who helped compile the report, said it did take mortality into account.

The report also proposed compromise plans, where the town would reduce pension benefits by a fixed percent and freeze them until overpayments have been recouped. It outlined what that would look like at 3, 5, and 7 percent.

For example, if the town opted for the 3 percent option, pensions would be reduced by up to 3 percent. If it takes less than a 3 percent reduction to get a pensioner’s benefits to the level they should be at under the plan terms, their benefits would be reduced by that smaller percentage. Those who would require more than a 3 percent reduction to get to the proper plan level would see just a 3 percent reduction. Their COLAs would be frozen at that level until what their benefits should be catches up to what they actually are, and until the town has recouped all past overpayments from them.

The higher the percentage cap on benefit reductions, the faster the town realizes savings and the more it can get. Higher percentage reductions, on the other hand, mean bigger cuts to the pension income that pensioners and their spouses depend on.

The board did not take any votes on Wednesday. After the report, it went into a long executive session so Wallman could explain the board’s legal obligations and other legal parameters of the situation.