Hopes for a retirement incentive could sway concession vote

As state employees weigh the concession deal now being voted on by unions, one major factor is what workers rely on in assessing the prospects for an early retirement incentive offer: the insistence of a new governor that such an offer won’t be forthcoming, or the actions of four previous governors who have turned to retirement programs in times of fiscal strain.

Retirement incentive programs, though controversial, have been a popular choice among prior governors and legislatures to cut personnel costs–in the short term–during tough fiscal times, having been offered five times since 1989. A sixth would have been made available in 2010 had state union leaders accepted a proposal from then-Gov. M. Jodi Rell.

But state employees are expected to decide the fate this week of a tentative deal with Gov. Dannel P. Malloy’s administration that not only would impose a two-year wage freeze, but would require many employees to work longer before qualifying for retirement benefits.

If it fails, Malloy has said, it could mean as many as 7,500 employee layoffs over the next two fiscal years. But could it also mean state government would again pad senior workers’ pension payments if they agree to retire early?

Union officials say privately that the question came up repeatedly during information sessions on the concession deal, and comments posted to news websites frequently speculate that Malloy will offer an early retirement plan if the deal is rejected. But a top Malloy aide Monday reiterated that it isn’t going to happen.

“There is no circumstance under which this is happening,” senior adviser Roy Occhiogrosso said, repeating a position the governor has stressed on several recent occasions. “Paying people to do something they’re inclined to do anyway is bad public policy and it’s expensive.”

Not only has Malloy vowed not to offer incentives to shore up the current budget, but his concession package includes several provisions that would require newer employees to work longer before qualifying for retirement benefits.

For example, workers currently need to reach age 60 with 25 years of service, or 62 with 10 years, to qualify for normal retirement benefits. Those conditions would jump to age 63 with 25 years or age 65 with 10 years for any current workers who plan to retire after July 1, 2022.

And the penalty for workers who want to retire early even if a special incentive program isn’t being offered would grow under this deal. Workers’ pensions would be reduced 6 percent, rather than the current reduction rate of 3 percent, for each year they leave state service early.

Occhiogrosso said those who use recent history as their guide on this matter will be disappointed. “Those were other governors. I think one thing Governor Malloy has demonstrated so far is that he is different.”

What hasn’t differed over the past two decades has been state government’s response to severe fiscal shortfalls.

Though retirement incentives never have been the chief fiscal solution, they have been a consistent component. Such programs specifically were used to help balance budgets in 1989, 1992, 1997, 2003 and 2009.

A 2010 panel launched by the Rell administration to study the cost of state employee retirement benefits warned that workers have come to anticipate these periodic incentive deals and delay their retirement plans to take advantage of them.

According to records from the comptroller’s office, retirements since 1989 have averaged 1,080 workers in years without incentives, and 4,285 in years with them.

The theory behind these retirement incentives is simple: Senior workers retire sooner than they planned – relieving the state of their higher salaries – and some are replaced with lower-paid hires.

But critics have argued that the savings from these programs are an illusion, and that any short-term reduction in salary costs is eventually offset by the long-term losses suffered by a pension savings account robbed of investment earnings.

The State Employees Bargaining Agent Coalition formed a similar conclusion in April 2010, rejecting an offer from the Rell administration for a second consecutive retirement incentive plan and arguing that the state employees’ pension fund could not afford another hit.

SEBAC spokesman Matt O’Connor said Monday that “you could forgive (employees) for thinking another one is coming,” noting that even union opposition didn’t stop the 2003 incentive plan offered by then-Gov. John G. Rowland. “If there’s anyone to blame for the expectations, … let’s look no farther than John Rowland.”

But O’Connor added that union leaders believe Malloy is sincere in his pledge not to offer an early retirement incentive program and they remain wary of one as well. “I believe leaders knew all along that an ERIP would not be part of the final agreement. The state is dangerously understaffed and the retirement system is poorly funded.

The last actuarial valuation of the pension fund, released last November and based on financial data through June 30, 2010, found that the account held less than 45 percent of the funds its needs to meet obligations to workers, plunging below the halfway mark for the first time in more than two decades.

In fact, Rell’s own study panel not only noted six months later that “these incentive plans add to the state’s liability,” but suggested that offering incentives to workers to delay retirement would strengthen the pension system.

During last fall’s campaign, Malloy criticized his GOP predecessor for relying heavily on borrowing, other revenues from one-time sources, and fiscal gimmicks such as retirement incentives, to effectively push a large state deficit – plus interest – onto the next administration. And Occhiogrosso noted Monday that the $20.14 billion package Malloy and lawmakers settled upon during the just-completed legislative session for the 2011-12 fiscal year closes a historic budget deficit without such fiscal shortcuts.

Occhiogrosso added that the administration remains hopeful that workers will accept the deal, which also offers four years of protection against layoffs, and annual raises of 3 percent in each of the three years following the wage freeze. Also unlike past administrations, talks between the union leaders and the Democratic governor were amicable, the senior adviser said. “There were no threats, no protests, no animosity,” he added.