The state’s largest public college system has an $18 million to $20 million hole in its budget that needs to be closed, and officials are counting on the state to bail them out.
Officials at Connecticut State Colleges & Universities are hoping the state will pick up most of this projected deficit, leaving them with just $5 million to $6 million to find themselves.
“This is something we are going to have to get a handle on,” said Jim Howarth, the interim budget chief of the 100,000-student system.
News of the size of the deficit – which is nearly 2 percent of the system’s total operating budget - follows community college presidents' reporting that they have already had to cut programs and increase class sizes.
The unexpected shortfall hit officials in higher education -– including at the separately operated University of Connecticut system –- after the state comptroller told public university officials that they would need to contribute more than they did last fiscal year to cover current and retired employees’ health and pension benefits.
The state each year picks up the cost of some of the benefits for college systems’ employees. And university officials are hoping the state can pay $12 million to $15 million for their most expensive employees on top of what the state is already paying this year.
It is unclear if the state comptroller's office will pick up most of the shortfall. State law indicates that the the governor's budget office would get to make that call.
Howarth said it is realistic to assume that the state will pick up at least $12 million based on the share of the costs the state has historically paid for.
Why the increase in costs?
The unexpected jump in the cost to provide employees health and pension benefits is the result of several factors, including a wave of employees switching over to a more expensive retirement plan, university budget officials say.
A state labor arbitrator two years ago ruled that the state's public colleges must offer employees a second opportunity to join the state's pension retirement system versus the 401K-type retirement plan many are enrolled in now.
The difference means that either the state or the college system will be on the hook for paying significantly more each year toward the state's pension plan, known as the State Employees Retirement System (SERS).
Under the defined contribution, 401K-type plan, the required annual contribution for the state is 11 percent percent of each employee's salary. Under SERS, the required contribution is 55 percent.
For example, for an employee earning $50,000 annually, the difference is a $5,500 annual contribution vs. a $27,500-a-year contribution. The difference is so dramatic because the state is playing catch-up after years of chronically underfunding its pension liabilities.
The 55 percent of its payroll that the system must put aside to cover these benefits is a large increase over what the system was budgeting for. In the fiscal year that ended June 30, ConnSCU was required to put aside 46 percent of its payroll to cover these costs. That increase is partially the impact of the governor’s office deciding that the state will begin contributing more to the state’s unfunded pension obligations.
If everyone eligible at the Board of Regents' 17 institutions switches to the SERS pension plan, it would cost an additional $78.8 million a year, budget officials at the college system said earlier this year.
So far, 335 employees have changed over to the more-expensive retirement plan, and no one knows how many more employees will switch.
“Unfortunately it’s one of those items that is completely out of our control,” Howarth, the budget chief, told the system’s Finance Committee Tuesday.
Regents on the committee said this leaves them system incredibly fiscally vulnerable.
“This has the potential to be tens of millions of dollars,” said Gary Holloway, the chairman of the committee.
Another contributing factor to the increase in the cost of providing benefits is the 5 percent pay raises union employees and 3 percent increases non-union staff received at the beginning of the fiscal year. The raises require that the system contribute more to their retirement plans.
More raises for non-union staff?
Another hole was ripped into the college system’s budget last week after the state directed it to give the managers another raise this year on top of the 3 percent they were already awarded.
“There is no additional funding [from the state] that goes with that,” said Gregory Gray, the system’s new president.
“It’s like them saying, ‘Hi, we want you to grant your employees 3 percent for merit raises – Go find it,” said Naomi Cohen, a member of the system’s governing board.
College officials and other state agency heads last week were directed by the Department of Administrative Services to evaluate all of their managers for an Oct. 4 lump-sum “merit increase” payment.
“Human resources must be notified by September 20, 2013 of any situation involving managers who are not eligible for the merit increase due to unsatisfactory performance or a second consecutive rating of Need Improvement,” the memo from the governor’s commissioner at the department says.
Gian-Carl Casa, spokesman for the governor's budget office, said the administration understands the fiscal challenges the college system faces.
“We understand that the [Board of Regents] like all state agencies, has often had to struggle to meet its mission with the financial resources available to it. We recognize that the tight budgets caused by the sluggish economy force very difficult decisions and that this is true for the BOR as it is for Connecticut’s families and businesses,” he said in a statement.
Where’s the money going to come from?
Three options are being considered to close the budget gap: funding from the state, cuts at the colleges or tapping the system’s emergency budget reserves.
“Worse comes to worse we will probably have to use the reserves. Hopefully it will be a one time thing,” said Richard Balducci, a member of the Finance Committee and former speaker of the State House of Representatives.
System officials reported this past spring that they had $66 million in reserves not already designated to specific projects. Information was not immediately available as to how that compares to previous years, though board members say they are concerned with using one-time funds to cover what will be annual expenses. The committee did consider a proposal to tap $5.5 million from the reserves to furnish a new library at Southern Connecticut State University.
“This is why we have a reserve,” said Southern’s president Mary Papazian.
Now the board just needs to decide if the deficit is also the reason they have a reserve.
"We used a lot of reserves in the last two years," said Holloway, adding he's hesitant to do it again.
The University of Connecticut this fiscal year voted to use $30.9 million of their emergency reserves to close a budget gap that partially came from the unexpected increase in providing health and pension benefits. The use of reserves made up 2 percent of the university's entire operating budget.
Staff writer Keith M. Phaneuf contributed to this report.
Board of Regents deficit projections (Return to where you were reading in the article here.)
Memo directing the Board of Regents to provide "merit" raises to non-union staff (Return to where you were reading in the article here)
Connecticut State Colleges & University reserves (Return to where you were reading in the article here.)
State law surrounding state funding for fringe benefits (Return to where you were reading in the article here)
Memo authorizing raises for non-union staff (Click here to return to the article)