Labor in the crosshairs as budget crunch worsens
Connecticut’s labor leaders insist the writing is on the wall.
Barring a dramatic new development, they say, state employees will be asked to grant wage and benefit concessions for the third time in seven years.
Perhaps the request will come this spring. Perhaps it will come in 2017 — just after the next state election. In some smaller ways it already has begun.
But that doesn’t mean that workers are ready to endorse more givebacks.
“This whole idea of a ‘shared sacrifice’ is OK,” Sal Luciano, longtime executive director of Council 4 of the American Federation of State County and Municipal Employees said in a recent interview. “But I keep asking, ‘When are we going to share it?’”
Lori Pelletier, head of the Connecticut AFL-CIO, said legislators and Gov. Dannel P. Malloy’s focus has shifted ever since last June, when GE and several other major corporations said planned tax hikes would force them to consider leaving the state. GE announced in January it was moving its global headquarters from Fairfield to Boston.
“GE, what they did, poisoned the well,” Pelletier said.
Call for new labor concessions builds
Shortly before GE and other companies made their threats, the Republican minorities in the state House and Senate urged Malloy to seek concessions — a call the GOP repeated during a special session on the budget last December, and once again last month.
“Connecticut is stuck in a fiscal fiasco, and it’s time for serious changes in the way our state budgets,” said Senate Minority Leader Len Fasano, R-North Haven. “… We have to plan ahead. We have to budget for generations, not elections.”
“This isn’t an annual deficit (problem) anymore,” said House Minority Leader Themis Klarides, R-Derby. “The situation worsens month to month.”
The red ink built into the first two fiscal years after the November elections totals just over $4 billion and represents a budget gap of 10 percent, according to nonpartisan analysts.
“We have got to get out of this, ‘This is how we have always done it’ mentality,” Klarides added.
Democrats, who rebuffed the GOP’s first call for concessions last spring, have begun to shift.
House Speaker J. Brendan Sharkey, D-Hamden, last month became the first Democratic legislative leader to say the governor should seek to reopen the benefits contract with the State Employees Bargaining Agent Coalition.
“Our role at this time would be to encourage the governor to call for those” savings, he said.
Malloy has said his administration is focused on wage negotiations with individual bargaining units and it is premature to talk about broader concessions on benefits with SEBAC.
“I will not negotiate with our partners in labor from this podium or through the press,” the governor told legislators Feb. 3 in his State of the State Address. “Instead, I will simply say that our expectations for these negotiations should be based on what we can afford, not what we previously spent.”
The governor spoke in stronger terms last week, though, after nonpartisan analysts downgraded projected income tax receipts for this fiscal year and next by hundreds of millions of dollars. Malloy’s proposal to balance 2016-17 finances, which already counted on legislators’ agreeing to cut $570 million from a previously adopted spending plan, now is about $340 million out of balance based on the new revenue projections.
Union leaders say signs that the administration is targeting labor costs already are in plain sight.
Malloy’s Feb. 3 budget proposal for the 2016-17 fiscal year counts on reducing the workforce by “several thousand” employees to achieve savings targets, budget director Benjamin Barnes said.
And Luciano said the administration really tipped its hand in July of last year when it served pink slips to 95 employees at the state Department of Labor.
While the governor said the layoffs stemmed from new cutbacks in federal aid, state records showed the problems with federal funds dated back more than a year before that. And the Malloy administration had even used more than $14 million in state resources — most from off-budget — to resolve the issue without layoffs during 2014, when the governor was running for re-election.
“I’m afraid that was really the canary in the coal mine,” Luciano said. And while the administration found jobs in other agencies for most of the displaced labor department workers, he added, it still presented the issue as if a new development in federal funding had forced its hand.
“This was a way to say we don’t have the funds and we don’t have any choice,” Luciano added. “But we did have a choice.”
A big piece of the budget pie
Labor leaders concede one of the reasons personnel costs are a target is a simple matter of size. They represent a healthy share of overall state spending.
That’s not surprising, though, given that governments — by design — provide services that require workers.
According to the legislature’s nonpartisan Office of Fiscal Analysis, personnel costs represent one-third of this year’s general fund. Another 17 percent of the budget goes for grants to cities and towns — much of which also is spent on public-sector employees.
“The problem is those wages and benefits provide services to the people who pay taxes,” said Pelletier, who predicted residents will complain about lost services, not taxes, if programs for the poor and disabled, road maintenance and other vital services are weakened. “People pay taxes because they want services.”
“Government is instrumental whether you think it is, or isn’t,” Luciano said. “When you hire taxpayer-educated employees, that’s all government money.”
Union leaders also insist labor is being unfairly scapegoated over massive retirement benefit obligations that reflect decades’ worth of bad decisions by Connecticut governors and legislators.
Pension fund contributions and retirement health care costs — already rising rapidly and expected to spike over the next decade and a half — get plenty of headlines.
Connecticut’s unfunded long-term obligations in these areas total $48 billion.
According to a January analysis by CNBC — based on data from Moody’s Financial Services running through the 2014 fiscal year — Connecticut’s pension debt alone was $14,769 per person.
That’s second-worst among all states, topped only by Illinois’ debt. More importantly, Connecticut and Illinois are national outliers. The next closest state is New Jersey at $9,520, and the national average is just $4,383.
Connecticut amassed most of that debt between 1939 and the mid-1980s as it saved little or nothing for the extensive retirement benefits it promised.
It further undermined that bad head start between the mid-1980s and 2010 by frequently contributing less than fund analysts recommended for pensions.
Labor leaders acknowledge that some past concessions deals blessed the inadequate pension contributions — but that was done only because the likely alternative was worker layoffs.
Unions gave in 2009 and in 2011
More importantly, they say, history shows workers already have given their fair share.
Unions agreed in 2009 to a concessions package negotiated with Gov. M. Jodi Rell that was worth an estimated $300 million per year.
It featured a one-year wage freeze and required workers with less than three years of experience to contributed 3 percent of their pay to cover retirement health care costs.
But that deal also was criticized by Malloy for deferring contributions into the state employees’ pension fund and for paying incentives to encourage senior workers to retire early.
These tactics, though offering a short-term savings to the operating budget, cost Connecticut more money in the long run in the form of lost pension fund investment earnings.
Malloy came to the unions for help five years ago during his first year in office, when nonpartisan analysts projected an 18 percent hole built into the 2011-12 fiscal year.
The package included:
- A two-year wage freeze in exchange for four years of protection from layoffs;
- A requirement that all workers forfeit 3 percent of their annual pay to help cover their retirement health care;
- A wellness program that requires annual physicals and other screenings. Most workers participate but those who don’t face a $100 per month premium increase and a higher deductible;
- Increased prescription drug and emergency room co-payments;
- New limits on pension calculations, an increase in the retirement age and a stiffer financial penalty for early retirement;
- An optional hybrid pension for higher education.
“What happened in 2011 did a lot to help,” Luciano said, adding it was the first time Connecticut began to substantially save for a retirement health care program that had been pay-as-you-go for decades. “I think that was one of the biggest accomplishments.”
While the administration estimated the entire 2011 deal would save $900 million annually within two years, the actual savings built into the budget by then was just under $650 million.
And though the value easily outstripped those secured by any of Malloy’s recent predecessors, it still had its critics.
The plan promised labor-management panels would find $140 million per year in savings from efficiencies. This component was dubbed “the suggestion box” by then-House Minority Leader Lawrence F. Cafero, R-Norwalk — a term quickly appropriated by other critics — who called it “the hoax of the concessions deal.”
The chief efficiency panel didn’t hold its first meeting until late October 2011, shortly after The Mirror reported it never had met.
After an initial meeting at which it elected its leaders, the panel never produced any records showing it ever had met again. And neither the administration nor the unions produced any reports identifying specific efficiency proposals, or any savings they produced.
The deal’s image also was tarnished after the Malloy administration tried to give workers’ credit for $45 million in health care savings that nonpartisan analysts said were unrelated to the concessions. These included:
- $12 million in savings that came simply because less expensive generic drugs came on the market.
- And $33 million in pharmaceutical and medical service costs saved through changes negotiated by the comptroller and health care providers before the concessions deal even had been ratified.
Regardless of state government’s failure to save, Luciano said Connecticut still has the resources to meet its obligations. What it lacks is the political will.
“We hear about wealth inequity from the president and the pope, and Connecticut has the most inequity of all of the United States,” he said. “When I hear that GE left Connecticut because of the state pensions, it almost makes me want to laugh.”
Does CT’s tax system favor the wealthy?
Unions have argued for years that Connecticut’s wealthy got a tax break of historic proportions in 1991. And ever since then, legislators and governors have taxed the state’s financial services sector with kid gloves.
In 1991, just before the state income tax was enacted, the state imposed a 7 percent levy on capital gains, and a top rate of 14 percent on dividends.
But once the income tax was enacted, capital gains and dividends faced the same top rate as all other types of income at 4.5 percent.
For almost two decades since then, Connecticut’s income tax system remained largely flat, even after a middle-class credit to offset some local property tax costs was added in 1996.
Things began to shift in 2009 when Rell and the legislature raised the top marginal rate to 6.5 percent on earnings above $1 million.
Just two years later, Malloy and lawmakers bumped it to 6.7 percent, and added a “recapture” requirement that the wealthiest households pay that top rate on all earnings, and not just those above a high threshold.
And this past June, Malloy and the legislature bumped the top rate to 6.99 percent.
Despite these changes, though, labor leaders argue Connecticut still lags behind in terms of progressivity.
Middle income families also faced a rate hike in 2011, and the property tax credit has been reduced by 60 percent since then.
More importantly, they say, Connecticut’s top tax rate remains favorable for the wealthy compared with neighboring states – particularly with its two chief rivals to the south and west.
New York state’s top rate is 8.82 percent, and those living in New York City can face a top state-local rate combined approaching 12.7 percent. New Jersey taxes its wealthiest households’ highest earnings at a rate of 8.97 percent.
Massachusetts has a more favorable, 5.15 percent rate on most income, though it taxes some capital gains at a rate as high as 12 percent.
AFL-CIO chief: Public will protest service cuts
Pelletier and a coalition of unions and advocacy groups called D.U.E. Justice – A Coalition for Democracy, Unity, and Equality — unveiled a broad agenda last month focused on reducing income inequality and promoting democracy.
Members called for, among other things, increasing taxes on soda and capital gains and imposing a fee on large employers that pay workers less than $15 an hour – a measure dubbed the “Walmart bill” in previous legislative sessions.
“I know that the members of the Connecticut AFL-CIO have had enough and are saying enough is enough,” Pelletier said.
The AFL-CIO chief predicted the new austerity approach Malloy and other Democrats are espousing at the Capitol will spark another backlash — from a general public unwilling to accept poorly funded state services.
“They are going to have to collect these taxes eventually,” she said. “That’s the thing that is so frustrating.”
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