Concession deal relies on millions in assumed savings

Gov. Dannel P. Malloy’s labor deal relies largely on hard, verifiable cuts to achieve its $1.6 billion two-year target, but also includes hundreds of millions of dollars in softer assumptions about savings to be derived from things like retirement, employee suggestions and a healthier work force.

The deal now awaiting ratification votes by unionized state employees includes a two-year wage freeze worth $448 million–a hard number largely based on a 3-percent raise owed state employees on July 1. Another big number–an estimated $485 million in pension savings–is based in large part on changes to the way pensions are calculated and funded.

But the deal also relies on softer numbers, such as administration projections of $180 million in savings from employee ideas or assumption that enough employees will participate in a wellness-based health plan to save $205 million.

“Am I apprehensive that it’s a bold target? Yes,” said Benjamin Barnes, Malloy’s budget chief, referring to the nearly $205 million in savings that hinges on workers taking better care of their health. But he added that the administration and union worked closely with health care actuaries–analysts who closely monitor health care trends and their associated costs. “The actuaries think it’s a reasonable target.”

A preliminary fiscal analysis released Tuesday morning by Malloy’s budget office projects the deal, if ratified by unions and the General Assembly, would save $700.7 million in total in the fiscal year that begins July 1, and $901.2 million in 2012-13.

Nearly 13 percent of the total $1.6 billion biennial savings is tied to language in the deal that would press all employees and retirees 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.

Barnes added that an important safeguard also has been built into the plan in the form of penalty premiums and deductibles for nonparticipants. The administration expects to raise $36 million annually this way, and if larger numbers refuse to participate than expected, this number will grow quickly. “It’s highly punitive,” he said.

The deal also counts on a workers and the administration finding another $75 million in savings over the biennium working on a health care cost-containment panel.

Another big target Malloy hopes to hit involves the cost-saving measures union leaders have long insisted that rank-and-file workers have wanted to implement–but past administrations have refused to listen.

Barnes said these ideas include everything from tax auditing changes, agency restructurings, utility conservation, reductions in unnecessary management, and other ideas under development. And though he said the administration hasn’t performed a detailed fiscal analysis of each idea, it is optimistic that the “pool” of ideas workers have developed is sufficient to produce about $90 million per year in savings.

House Minority Leader Lawrence F. Cafero, R-Norwalk, charged that nearly $500 million worth of projected savings in the first two fiscal years of the Democratic governor’s deal came “out of thin air” with little to no justification. The minority leader particularly questioned the savings projections tied to the Valued-Based Health Plan and employee efficiency proposals.

“When you have … $180 million in so-called savings that will come out of an employee suggestion box,” he said, “that is really on shaky ground.”

“Why aren’t they making those suggestions now and why aren’t their managers listening to them,” said Senate Minority Leader John McKinney, R-Fairfield, who also objected to the four-year protection against layoffs that would be granted to all bargaining units that approved the deal. “Unfortunately, the more we see the details, the less there is to like.”

Cafero also charged Malloy with flip-flopping on past opposition to relying on retirement incentives to balance the budget.

Roy Occhiogrosso, the governor’s senior adviser, and Barnes said the administration was anticipating questions and challenges about the savings assumptions.

But the projected pension savings were fully vetted by actuaries who were constantly consulted during the labor talks.

“The actuaries were on speed dial,” Barnes said. “They were doing a lot of work for us.”

Occhiogrosso said the agreement meets Malloy’s goal of structural changes in the pension system that will save money now and for decades to come.

“He wasn’t looking to destroy the system,” Occhiogrosso said. “He was looking to save it.”

Mark Ojakian, Malloy’s chief negotiator on the deal, said Tuesday that the administration tentatively expects 1,000 senior employees to retire before a series of proposed rule changes designed to discourage early retirement kick in on Sept. 2–if the deal is ratified.

That would save an estimated $130 million over the next two years. In previous administrations, retirement incentive programs have been designed to replace about one-third of the outgoing workers with less experienced but lower paid replacements. Barnes said the administration hopes to replace only about 5 to 10 percent of the retirees under this plan.

Other more traditional components of the tentative agreement resemble past concession deals with state workers.

A two-year wage freeze would avert a 2011-12 pay hike authorized under the 2009 deal negotiated by then-Gov. M. Jodi Rell. That agreement called for a cost-of-living raise of 3 percent, plus step increases that would bring raises for workers close to 4 percent.

“I think the fact that you’re asking state employees to take two years of a hard wage freeze is a sacrifice,” Ojakian said. “They will be giving up that raise and another anticipated increase in 2013.”

The wage freeze is expected to save $138.9 million next fiscal year, and – assuming workers might be able to secure a pay raise in 2012-13 through arbitration similar to the hike they would forfeit in 2011-12 – another $309.5 million in the second year.

Workers also would forfeit a longevity payment in October 2011.

About $140 million of that two-year, $485 million pension savings, stems from the earnings workers would lose through the wage freeze.

Hartford attorney Dan Livingston, the unions’ chief negotiator, said in terms of dollars potentially coming from workers’ pockets, the wage freeze was the most painful concession.

Livingston also expressed optimism about the potential fiscal success of the Value-Based Health Plan. Research showed that only about 12 percent of people covered on state health plans were getting the full range of treatments recommended for most listed diseases, he said.

Livingston added that some smaller bargaining units could begin voting on the tentative agreement as early as next week, though it likely would be several more weeks before the matter is resolved. But the union negotiator said he is optimistic the package would be ratified.

“My experience is when union leaders believe in something, when they think it’s the right thing, when it’s explained carefully and the members have an ability to get all their questions answered, usually the members agree,” he said.

The deal also makes several changes designed to reduce state government’s pension contributions, with projected savings of $237 million next fiscal year and $248.3 in 2012-13.

Proposed changes include:

• Reducing pensions by 6 percent for each year that veteran state workers retire earlier than allowed under normal rules. The penalty currently stands at just 3 percent.
• Reducing the minimum annual cost-of-living adjustment in pension payments from 2.5 to 2 percent.
• Using an average of an employee’s five years of highest earnings for pension calculations for new workers. A three-year average is used to calculate pensions for current employees.