Connecticut’s bottom line depends on employee concessions

The world is a different place in the aftermath of the 2008 financial crash and the Great Recession — but not for Connecticut’s new governor, who emerged this week in his budget address as a traditional tax-spend-and-borrow Democrat.

Here are Governor Malloy’s proposals for fiscal year 2012 beginning in July: $1.5 billion in new permanent taxes; $500 million, or 2.4%, more spending than in FY2011, followed by a further $500 million increase in FY2013; and $1 billion in new borrowing over the next two years. This in a state with the highest per capita debt in the nation – and, apparently, one of only two states with no job growth over the last 20 years (Michigan, with its recently bankrupt and shrunken car industry, is the other).

How did Governor Malloy miss the entirety of “the new reality?”

Of course, he argues that he has made drastic cuts to embedded spending program growth, i.e. the growth that comes from built-in automatic escalators that fuel never-ending government spending increases. But there are only two reasonable escalators in the real world: inflation and increased demand for services. Well, the U.S. has had virtually no inflation for three years and nothing material is forecast for next year. And we have already experienced the increased demand for services from needy citizens thrown out of work by the Great Recession: that pressure has at least leveled off, if not started to decline, however slowly and agonizingly, as the national economy and job market improve ever so gradually.

But that national improvement may not come to Connecticut. Why would businesses come to a state with high taxes, which are now getting higher? If employers shunned Connecticut for the last twenty years, why would they come here now?

The recent election was interpreted on a national bipartisan basis as one with a single universal mandate: jobs, jobs, jobs. How has Malloy forgotten that – in only a few months? He did offer a flashy little program: “The First Five Initiative,” which provides special incentives to the first five employers who enter Connecticut employing more than 200 Nutmeggers. OK, what happens after the lucky “first” 1,000 come off our current unemployment roll of 170,000 fellow citizens?

Now, the post-Great Recession reality encompasses a significant dimension beyond taxes, spending and borrowing: unsustainable public sector employee compensation. Governors across the land are scaling back. Governor Malloy claims to be. His FY2012 budget projects $1 billion in labor savings with another $1 billion of savings the next year. Except that those savings are completely undefined. Curious: great detail, first on planned borrowing and new taxes, then on spending, but nothing on labor savings.

Why does this matter? Because, when Governor Malloy presented his budget, he talked about spending in functional terms–so much for education, for health services, for transportation, for public safety. He spoke in traditional budget terms, the way most governors have in the past. He didn’t speak in terms of the elephant in the room: within almost all of those functional categories, the largest expense item is state worker compensation; across all those categories, state worker compensation amounts, very roughly, to one-third of the entire budget.

When about one-third of the budget is out of control, how can you control the budget overall?

And non-federal worker compensation is out of control. Here are the numbers from the Bureau of Economic Analysis. On a nationwide basis, state and local government employee compensation grew 45% from 2000 to 2007 – and another 8% in the next two recession years, while private sector compensation grew only 33% from 2000 to 2007 and fell 3% in the following two years of recession. In Connecticut, state and local employee compensation increased even more: 55% from 2000 to 2007 and another 13% to 2009.

So, in his budget address, Governor Malloy left blank the most important line item in his budget. And then some! What he did say is that his “budget fully funds our pension obligations.” Wow, when talking about concessions, his most forceful statement was about paying benefits! To be fair, he did offer some “proposals” including a wage freeze, three furlough days, “adjusting the retirement age,” health benefit plan changes and a freeze on longevity payments (rewards just for remaining on the state payroll). Most observers believe such things as longevity payments should be eliminated, not set in concrete (AKA “frozen”). But these were only proposals.

The bottom line is… the state budget has no bottom line yet. The bottom line is state employee compensation concessions. Without them, the budget’s bottom line is a negative $1 billion. While Governor Malloy earned his merit badge this week as a tax-spend-and-borrow Democrat, he remains an unknown quantity in one important dimension: is he a coddler of unions or not; is he, or is he not, a blind man concerning the inevitable financial disaster flowing from unrestrained public sector compensation expense.

Red Jahncke is president of the Townsend Group, a Greenwich-based management-consulting firm. He can be reached at RTJahncke@Gmail.com