Malloy-labor concession plan could prompt a wave of retirements

Though Gov. Dannel P. Malloy has insisted he won’t rely on retirement incentive programs and other fiscal gimmicks to cut labor costs, his tentative union concession deal includes several retirement benefit changes that could encourage a wave of senior workers to step down this summer.

A summary of the tentative deal announced Friday by Malloy and the State Employees Bargaining Agent Coalition also would require all workers by 2013–and state government itself by 2017–to save for its largest unfunded liability: health care for retired workers.

The five-page summary, which was prepared by SEBAC and distributed to bargaining units Monday, also includes new co-payments for prescriptions and emergency room visits, restrictions on longevity payments, and a new proactive health care system that would require workers to participate or pay higher premiums.

“This agreement is not perfect, but in perilous times it is far, far better than the alternative,” the summary memorandum reads, alluding to the 4,700 layoffs Malloy said he would need to order if a concession deal isn’t achieved.

State employee salaries and benefits represent nearly 30 percent of the current annual budget and Connecticut has come under criticism from bond rating agencies, fiscal analysts and others for failing to adequately save for the pension and health care programs it offers its workers upon retirement.

Under the state’s current 20-year benefits contract with its 15 unions – which runs six more years but would be extended through mid-2022 under this tentative deal–most employees need 10 years or service by age 62, or 25 years by age 60, to retire with full benefits. After 2022, the agreement raises those retirement ages by three years.

The deal also makes it less attractive for workers to retire early–unless they leave by Sept. 1. Currently employees who retire early have their pensions reduced by 3 percent for each year they are short of normal retirement age. However, they will receive an average of 7.5 percent more in pension benefits for each year they retire early.

“This is expensive and raises the cost for those employees who work until their full retirement age,” the summary reads.

To offset that, the reduction rate would increase under the deal to 6 percent–but only with retirements begun after Sept. 1.

Similarly, early retirees will face new premium sharing for their health benefits.

The summary sheet does not disclose full details and fiscal analyses of the proposals in the tentative deal, but it did say these new premium requirements would be calculated by health care plan analysts. This premium sharing would affect most retirees who leave state service after Sept. 1, although employees with 25 years of experience wouldn’t be subject to this rule unless they retire after July 1, 2013.

Offering workers financial incentives to retire early have been popular both with the legislators and governors who offered them as well as the employees who participated in them.

Retirement data shows state employees tend to defer their retirement plans to take advantage of these lucrative incentive programs.

State government has offered five retirement incentive programs in the past two decades, providing them in 1989, 1992, 1997, 2003 and 2009. According to records from the comptroller’s office, retirements since 1987 have averaged 738 workers in years without incentives, and 4,285 in years with them.

In the short term, state government saved $125 million in 2009 with that year’s retirement incentive program, which attracted about 3,800 workers.

But these incentive programs have been criticized by economists, legislators and some union leaders for providing illusory savings, offering a short-term reduction in salary costs that eventually is offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

“Over the next few years I intend to reduce the number of state employees,” Malloy said Friday when he announced the tentative deal, though he didn’t say how much he expected it to save, how deeply he expected the workforce to shrink, or whether those savings were part of the $1.6 billion total advertised value of the concession package.

Another key change in the tentative deal would raise the minimum years of service needed to qualify for retiree health care from 10 to 15. But while the summary doesn’t provide full details, it does state this change “is phased in so as to not negatively impact current employees”–another move that could spur some senior workers to retire soon.

The tentative deal does not change the rule that includes overtime earnings in pension calculations for both early and normal retirees.

But it does change the pension calculation for all new workers, using an average of the five years of highest earnings, rather than the three-year average currently employed.

The agreement also begins to tackle state government’s largest, long-term fiscal hole, an unfunded liability of $26.6 billion tied to retiree health care.

State government primary has operated a pay-as-you go system, saving nothing toward this expensive obligation until 2009, when a labor deal required workers with less than five years of experience to contribute 3 percent of their pay.

This concession deal would require all workers to contribute, but only starting in July 2013 – after the next budget biennium has concluded. Workers with more than five years of experience would contribute 0.5 percent of their pay in 2013-14, followed by 2 percent the next year and 3 percent in 2015-16.

Starting in 2017, state government would have to match all workers 3 percent annual contribution.

Workers would be asked to pay more for health care under the plan. Co-payments for preferred brand name drugs–if they didn’t fall into the “maintenance” category for treating chronic illness–would rise from $10 to $20, while non-preferred, non-maintenance drug co-pays would jump from $25 to $35.

Workers with chronic illnesses would be required to refill prescriptions using less expensive, mail order services, and a new $35 co-payment would be added for emergency room visits for ailments that don’t require hospitalization. “We’ve had some people using the emergency room as many as 150 times a year!” the summary states.

To encourage all workers to maintain their health, the deal would urge all employees to join a Value-Based Health Care Plan. In this program, workers would commit to have regular physicals and other key health screenings. Those who don’t participate would face a $100 per month premium increase and a $350 per person deductible.

The plan also calls for:

• A pay freeze for the next two years, followed by 3 percent raises in each of the following three years.
• One canceled bonus payment for longevity service for most workers this October.
• New technology and labor-management committees to improve technology for workers, reduce reliance on private consultants and remove excessive layers of management.
• And an executive order directing agencies to ensure private-sector vendors contracting with state government “do so at reasonable rates of return and under terms that reflect the shared sacrifice being asked from all sectors.”