If Gov. Dannel P. Malloy and state-employee unions strike a tentative concessions deal this week, the governor and legislators face a crucial balancing test — setting today’s dire budget crisis against bigger problems that await tomorrow.
Is $713 million in immediate fiscal relief, the estimated value of the first year of a preliminary deal for employee pay freezes and increased contributions to pension and health costs, worth ceding the authority for five years to make further changes to what would remain a badly underfunded retirement system?
The question about Connecticut’s ability to weigh future costs against immediate needs comes as the state’s cash-starved benefits system, as well as its impending deficit, are drawing unprecedented harsh reactions from Wall Street.
So should Connecticut seize concessions that could minimize painful cuts to local aid and services, or turn them down and engage in a campaign for broader, structural changes to both the level of benefits offered to employees and collective bargaining rules when the existing deal expires in 2022?
House Speaker Joe Aresimowicz, D-Berlin, a union employee, suggests it would be dangerous to snub labor’s offer now, while business-friendly groups are urging the state to think bigger and longer-term.
‘We can’t have incremental changes’
“I think we have to have unprecedented scrutiny over the changes that are being proposed,” said Joseph F. Brennan, president and CEO of the Connecticut Business and Industry Association. “This is a very critical time for the state of Connecticut, and we can’t have incremental changes around the margins. We have to have major structural change if we’re going to pull the state out of the doldrums.”
That has been a business demand for months. R. Nelson “Oz” Griebel, chief executive officer of the MetroHartford Alliance, told The Mirror during a mid-February interview that any deal should include a 401(k)-style benefit in lieu of a pension for future state workers.
“In a time when defined-benefit programs have essentially gone the way of all flesh for everybody in the private sector, having one segment of the population having it — that’s funded by the private sector — is one that I think is a legitimate philosophical question,” Griebel said. “It needs to get a full airing.”
Lawmakers should think long and hard before tying the hands of taxpayers yet again,” said Carol Platt Liebau, president of the Yankee Institute, a conservative fiscal policy think-tank. “Before offering a contract extension, Gov. Malloy should end the practice of unaffordable pension promises and convert new state employees to the 401(k)-style retirement plans that almost all other workers have.”
With about $34 billion in unfunded liabilities, Connecticut has one of the worst-funded retirement benefit packages for state employees in the nation. Connecticut has enough assets to cover 35 percent of the long-term obligations in its pension fund for state employees. And earlier this year it struck a deal to shift $14 billion to $21 billion in pension contributions until after 2032.
The fund to pay retiree health is in far worse shape with assets equal to less than 1 percent of its long-term obligations to retirees and current workers.
The situation is marginally better as it applies only to current workers: Connecticut currently saves less than one-fourth of the funding it should reserve annually to cover the retirement health care of present-day workers. That is scheduled to improve to just under one-half next fiscal year.
But the rest of this benefits’ cost for present-day workers would be borne by future taxpayers.
CT can’t get something for nothing
Sources say the deal Malloy and the union negotiators are closing in on would save close to the targets Malloy established: about $713 million next fiscal year and $849 million in 2018-19. This would be done through a three-year wage freeze, higher health care and retirement benefit costs for workers, and three furlough days.
The state would accept some restrictions on layoffs and would extend the benefits contract for five more years.
“We do not yet have a deal,” Malloy spokeswoman Kelly Donnelly said Monday. She did not offer further comments not on the talks.
Still, the administration has tried to build expectations in recent months about what Connecticut reasonably can anticipate.
One concessions deal cannot reverse eight decades of inadequate savings for retirement benefits, nor can it close the entire hole in the next state budget.
With about 50,000 full-time equivalent positions in state government, a concessions package worth $870 million at full implementation equates to a sacrifice of about $17,400 from every worker.
Some of that total represents retroactive wage hikes workers otherwise might receive given that most are working under contracts that expired last June.
Officials bolstered the bottom line on past concessions packages by deferring contributions into pension funds or by paying senior workers extra money to retire earlier — gimmicks that weakened the pension fund.
Neither of those measures are expected to be included in the next deal.
And even as officials from both parties cite a need to reduce long-term benefit obligations, they also acknowledge an urgent need to cut spending now.
Need for immediate labor savings grows
Three of the four major credit-rating agencies on Wall Street downgraded the state’s bond rating earlier this month. And while all three cited the retirement program debt, they also called for Connecticut to address the growing deficit in its next budget.
Less than one month ago, analysts said state finances, unless adjusted, were running deficits in the next two fiscal years of close to $1.7 billion and $1.9 billion, respectively.
But that changed dramatically in late April because of rapidly eroding state income tax receipts.
The potential shortfalls now approach $2.3 billion, or 12 percent, in 2017-18, and $2.8 billion or 14 percent the year after that.
Concessions at the level sought by Malloy would close about 30 percent of the updated, projected gaps.
Even with those concessions savings assumed, budget proposals from Malloy and from legislative leaders rely on hundreds of millions of dollars in new tax revenue and municipal aid cuts to balance the books.
Separate plans from House and Senate Republicans sought even more concessions, worth about $1.1 billion per year.
Even with those target numbers, the Senate GOP plan cut about $280 million from a program expected to share $340 million in sales tax receipts with cities and towns next year, while the House Republicans recommended eliminating it entirely.
The top Republicans in the House and Senate, Themis Klarides of Derby and Len Fasano of North Haven, have called repeatedly in recent years for major “structural change” to curb labor costs, including not guaranteeing benefits contractually to future workers.
That couldn’t be accomplished under either the current benefit contract, or — according to sources — under the modifications being negotiated.
“I certainly understand that, in any good negotiations, you have to give something to get something,” Klarides said. “But unless there is a complete change in direction — things like defined contribution, reductions in the workforce — unless we actually change the course of the state of Connecticut, any extension on this contract should not be entertained.”
Fasano said last week he would consider supporting an extension if workers granted concessions equal to the larger savings target Republicans have set — about $1.1 billion per year. He added those concessions must involve changes that produced big savings year-after-year, and not for a short period.
Republican leadership also indicated Monday that any tentative deal should be voted upon directly by the legislature. An existing rule allows the legislature to ratify contracts and amendments by default.
Aresimowicz, the top leader in the House, applauded the near-deal, based on media accounts he’s read.
“It seems like they’ve come to the table and provided us the much-need relief — the $700 million this year and the $800-million-plus next year,” he said. “I hope the members ratify because it’s included in all of our budgets.”
Can Republicans be serious players in budget talks, given their assumption of bigger concessions?
“They may, in fact, rule themselves out from those negotiations if they are expecting those to happen,” Aresimowicz said.
“Now remember, if we say no, it’s not enough and walk away, there may be no savings at all,” the speaker added. “If the union members themselves walk away and say ‘no we re not going to ratify it,’ those savings aren’t going to be included and then we’re all in a vastly different conversation than we are today. … I would tell everybody to proceed with caution. This is probably the best deal we can get for the state of Connecticut.”
Would workers grant more concessions?
Meanwhile, the question of whether workers would ratify their third concessions plan in nine years remains unanswered.
With income tax receipts eroding, the governor and legislature face pressure from Wall Street and other business groups to avoid a major increase in the tax on earnings.
But union leaders have argued frequently in recent months that Connecticut should look to its wealthiest households first, and not to employees who granted concessions in 2009 and 2011.
And they say workers are being vilified for a problem they did not create.
About 80 percent of the $1.56 billion Connecticut must contribute to the state employees’ pension fund this fiscal year is needed to compensate for contributions the state failed to make in the past — rather than to cover the cost of benefits to present-day workers.
The state AFL-CIO and the Center for Public Policy and Social Research — a policy think-tank at Central Connecticut State University in New Britain — released an analysis last month showing businesses here enjoy some of the best economic advantages in the nation.
The labor group argued Connecticut businesses should pay higher taxes to support investments in education, health care and other priorities to grow the economy and preserve quality of life.
AFL-CIO President Lori J. Pelletier also has been critical of the administration’s decision in recent months to dedicate more than $80 million in total assistance to two major hedge funds.
“We’ve always been willing to step up and try to resolve this together,” Pelletier said Monday. “But where it gets frustrating is that it’s taken as a given that public-sector workers will give back, but they eliminate any discussion about looking elsewhere in the budget?”