The red herring in the Fiscal Stability Commission’s impressive report
With the many and varied issues the state of Connecticut currently faces, our legislature can ill afford wasting time on any issue that will not contribute to immediate fiscal relief or long-term fiscal health. The new report issued by the Commission on Fiscal Stability and Economic Growth outlines a number of critical issues that demand action, all intended to improve the state’s fiscal standing. Unfortunately, the report also includes suggested changes to collective bargaining for public employees: changes far more likely to distract from larger problems than to result in significant savings to the state.
Connecticut faces a long list of economic and fiscal challenges, including anemic employment and wage growth, an aging population, decaying transportation infrastructure, yawning economic inequalities, continued underinvestment in children and families, and rapidly rising non-functional costs. New fiscal restraints, in the form of a volatility cap, spending cap and bond cap, scheduled soon to be locked into covenants in Connecticut’s general obligation bonds, will only increase this fiscal distress.
Tasked with solving many of those problems and given only a few months to do so, the Commission on Fiscal Stability and Economic Growth has issued an impressive final report. It includes astute recommendations on transportation and a careful analysis of the draconian fiscal restraints and bond covenants, which will hopefully lead to legislative action.
Unfortunately, the Commission’s report also includes at least one significant red herring which we fear may distract from its core work: the recommendation to remove collective bargaining powers concerning defining fringe benefits, including pensions, for new state employees. Without addressing the relative merits of collective bargaining, we can assert with confidence that this highly controversial recommendation threatens to distract lawmakers from the real challenge of balancing the state’s long-term finances, a challenge which the collective bargaining debate does little to solve.
It is true that Connecticut has a pension problem. The State Employees Retirement System (SERS) alone needs to make up an unfunded liability of $21 billion over the next several decades. Taxpayers have footed an ever-increasing bill, escalating from $720 million in FY 2010 to $1.5 billion in FY 2017, and they have a lot of ground to make up. Collective bargaining, however, did not cause this problem—and restricting collective bargaining would do nothing to solve it.
In fact, the unfunded liabilities arose from a failure to save: for decades, the state failed to make adequate contributions to the pension fund. Connecticut only started making full actuarially required payments in 2013, and the SERS funded ratio remains a paltry 38.1 percent, far below the nationwide median funded ratio of 71.1 percent. Notably, similar problems plague the Teachers’ Retirement System (TRS), which is not a product of collective bargaining.
The vast majority of those unfunded liabilities stems from benefits owed to employees who are already retired or are close to retirement. Of the roughly $21 billion in unfunded liabilities, $15 billion is attributable to Tier I hires, who were hired before 1984. The state now fully funds newly accrued benefits as they are earned — but the historical debt still weighs down the pension funds. Service costs for current employees made up just 31 percent of the actuarially required contribution for 2017; any reduction to benefits for future employees cannot impact that remaining 69 percent.
Those retirement benefits that are attributable to vested members, including Tier I employees, are constitutionally protected and would retain those protections regardless of any changes to collective bargaining.
Connecticut courts have found that property law protects public pension benefits; in addition, the collective bargaining process has a distinctly contractual flavor, meaning that more stringent contract law likely also protects those benefits. As a result, the proposed restrictions on collective bargaining will not enhance the state’s ability to unilaterally alter benefit plans already established through negotiation.
Since changes to collective bargaining would not allow the state to find savings in benefits to vested employees, the Commission’s proposal would only affect new and future employees. Recall, however, that it is old liabilities that are weighing down the system. No benefit will come from conflating the problem of accrued unfunded liability and retirement benefits for new and future hires.
We note that the 2017 SEBAC agreement, itself the product of collective bargaining, yielded a new tier of state employees with dramatically higher employee contributions paired with lower benefit levels. The average state employee hired since July of last year will likely make $28,000 per year upon retirement while committing 6.5 percent of annual salary to that plan. This puts Connecticut’s estimated per-employee payout behind every other Northeastern state except Rhode Island, with annual employee contributions also above the Northeast average.
With these facts in mind, it is unclear what, exactly, Connecticut would gain from removing collective bargaining.
Pension benefits for new hires are already low in comparison to other states, and further decreases would likely harm the state’s ability to attract talented employees into public sector roles. It would be difficult to find additional savings: the 2017 collectively bargained SEBAC agreement resulted in the largest savings in Connecticut’s history, with a cumulative total of $24 billion cut from future wages, active employee healthcare, retiree healthcare, and pensions. Even assuming there is room to cut further, the cuts would barely impact the state’s unfunded liabilities — since the vast majority of those liabilities stem from benefits owed to Tier I employees, which are constitutionally protected.
Looking ahead, Connecticut still faces a long road to fiscal stability. Successfully navigating these challenges will necessitate creativity, open-mindedness, collaboration, and decisive action. Unilateral legislative restrictions to state employee collective bargaining would do little to address those problems. However, it would slash open rifts between state employees and the legislature that would, in turn, jeopardize prospects for the collaboration that is so badly needed to ensure success in Connecticut’s long-term fiscal project.
Rather than spending precious time on such a controversial proposal that promises little in the way of savings to the state, the legislature should focus its energy on developing a clear and compelling long-term vision for our state, including strategic investments in education, healthcare, and transportation infrastructure that would encourage the type of economic growth that has eluded our state for so long.
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