Gov. Dannel P. Malloy insists state government alone no longer can shoulder the burden of paying teachers’ pension costs set to skyrocket over the next 15 years.
But that same volatility threatens his plan to spread those costs — directly and indirectly — onto municipalities, hospitals and the federal government.
Simply put, the resources Malloy is offering to those who would share the state’s burden aren’t likely to grow anywhere near as fast as a pension bill that could more than quintuple by the early 2030s.
In Malloy’s new two-year budget proposal the teachers’ pension bill is the hot potato.
‘We didn’t break it’
“We didn’t break it, why should we buy it?” Coventry Town Manager John Elsesser, former president of the Connecticut Council of Small Towns and a longtime advocate for municipalities, tweeted when Malloy first proposed forcing communities to pay just under one-third of teacher pension costs.
Arguably the fastest-growing major component of the state budget, the pension fund — like other state retirement benefit programs — is plagued by more than 70 years of inadequate contributions.
The $1 billion contribution Connecticut must make this fiscal year — roughly 6 percent of the General Fund — will grow a whopping 33 percent over the next two fiscal years alone.
For example, if the proposed cost-sharing system were in place, municipalities would owe $320 million this fiscal year. The bill they would face in 2018-19, the second year of Malloy’s two-year budget proposal, is $421 million.
And if average growth of 16 percent per year sounds bad, a 2015 study by a nationally recognized policy think-tank suggests things will only get worse for some time.
The Center for Retirement Research at Boston College projected that the contribution would top $6.2 billion by 2032.
In return, Malloy shielded most municipal grants from deep cuts. (Education Cost Sharing was reduced, but those funds were funneled into increased special education aid for municipalities.)
Municipal advocates made it clear Wednesday they don’t want to own one-third of that monstrous teachers’ pension bill, adding they remain unconvinced local aid will remain protected even if they do.
“That’s a formula that, for me, doesn’t make for a fair comparison across the state,” said Litchfield First Selectman Leo Paul, president of COST.
“Towns and cities are so dependent on state aid which continues to be unpredictable,” said Joe DeLong, executive director of the Connecticut Conference of Municipalities.
Even under the governor’s plan, state government still would see its teachers’ pension bill quadruple over the next 15 years.
And despite a new agreement to restructure and defer some payments into the state employees’ pension fund, the administration projects that expense will grow, on average, by more than 8 percent per year over the next five years.
Combine that with a new requirement to set aside $120 million yearly for retired state workers’ health care, and retirement benefit obligations still threaten to siphon dollars away from municipal aid for years to come.
“This further pressures municipalities to reduce vital services or increase already high property taxes to offset reductions in previously committed state aid,” DeLong said.
Malloy argued it is unfair that state government cover the full cost of municipal teachers’ pensions, but Betsy Gara, executive director of COST, said the existing binding arbitration system — established in state law — has given cities and towns too little ability for decades to stem rising teachers’ salaries, which in turn drives pension costs.
Hospitals wary of Malloy’s track record
Paul noted that only 31 out of 169 cities and towns came out ahead under the governor’s plan. And most of those were the 38 cities and towns that are host to one or more hospitals, or to some of their auxiliary medical centers.
The Malloy administration estimates those communities would be able to raise $212 million through his proposal to end nonprofit hospitals’ exemption from the local property tax.
In return, the state would increase its payments to hospitals by $250 million per year. But because those payments would be eligible for federal Medicaid reimbursement, the net cost to the state would be less than $88 million per year.
But this offers little peace of mind to the hospital industry.
“Our hospitals are the bedrock of our society and have strong and unique partnerships with their local communities,” Jennifer Jackson, CEO of the Connecticut Hospital Association, said Thursday. “We urge legislators to reject this budget gimmick, which undermines these partnerships. We look forward to continuing to work with legislators to protect patients, hospitals, and healthcare in Connecticut.”
Why is the industry leery?
The governor also proposed eliminating $11.8 million in annual funding for small hospitals.
More importantly, though, industry officials say they’ve already seen how growing pressures on state finances negated promises to assist hospitals in recent years.
In 2011, a new provider tax was imposed on hospitals only as a legal maneuver to qualify Connecticut for federal assistance through Medicaid. The state collected $350 million in taxes on the industry, but returned $400 million in supplemental payments.
Over the past six years, though, the tax has grown and the supplemental payments have shrunk — despite an increase in the federal reimbursement rate. Hospitals will pay $556 million in total this fiscal year and receive $117 million back as Connecticut misses out on hundreds of millions of dollars in potential federal reimbursement.
The association has challenged the hospital tax in court, and also has asked the federal government to declare that the state tax and Medicaid rates violate federal law.
“There is a well-earned mutual mistrust between the Malloy administration and the hospital industry,” Malloy’s budget director, Office of Policy and Management Secretary Ben Barnes said Wednesday, adding that the administration is prepared to work through it.
And what happens if Medicaid becomes less generous under President Trump’s new administration.
Malloy’s budget office hinted at that possibility in the introduction to the governor’s biennial plan, even as it defended the unpopular cost-sharing moves that were proposed.
“These measures are necessary because the state faces a daunting scenario of slow-growing revenues to support fast-growing fixed costs, particularly pension and healthcare costs,” the Malloy administration wrote. “Moreover, we face an economy that remains fragile and an unprecedented level of uncertainty about federal revenue, especially federal support for healthcare and federal infrastructure investments.”
Legislative leaders said they understand the wariness of municipal leaders and hospital officials.
“I’m not surprised at the response,” said Rep Toni E. Walker, D-New Haven, longtime House chairwoman of the Appropriations Committee, who added no one should assume each new burden imposed in the governor’s budget can be offset for long with a matching solution. “It is very hard to assume that every loss in that budget is covered. I think there are a lot of surprises in these, and we’re going to be researching for a while to understand all of the effects.”
“His proposals are guaranteeing that property taxes are going up,” House Minority Leader Themis Klarides, R-Derby said.