Can changing a single number save Connecticut more than $2 billion?

In the draft report actuaries noted savings from increasing the discount rate from 4.5 percent to 5 percent. They listed several changed assumptions along with the discount rate change that as a group saved the state $6.2 billion. Another group of changes saved the state $4.94 billion.

Some of the other changes adopted in the draft report included a reduction in the rate of medical inflation and a transition to a Medicare prescription drug program that has accounting benefits.

For more on the draft report, read my article here.

In the final report, the actuaries included a separate line item at the request of state officials, increasing the discount rate to 5.7 percent.This simple change reduces the state's liability by $2.1 billion.

More from my article yesterday on the new report:

Connecticut taxpayers owe $2.1 billion less for state retiree healthcare, according to a new report released Thursday, because actuaries changed one number used to calculate the long-term cost of the benefit.

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.