Editor’s Note: This article is co-authored by Jared Shields.
Connecticut Governor Dannel Malloy struck a tentative deal with public employees just days before the start of fiscal year 2018. Union members will now consider ratification of the agreement. The current framework is the product of months of collective bargaining between the governor and the State Employee Bargaining Agent Coalition (SEBAC).
What does this new revision mean of Connecticut? The Framework for 2017 Revised SEBAC Agreement provides the details. Much of the acclaimed success on the wage growth component fiscal success of this proposal is illusory. The deal does freeze wages (a true 0 percent wage growth freeze) for fiscal 2018 and 2019—a first ever such Connecticut public sector union concession. But wages will increase by 3.5 percent in both FY 2020 and FY 2021. Although the plan boasts “savings” from wage concessions totaling $733 million in FY 2018 and FY 2019, the savings are based on what wages would have been with 3.5 percent growth in FY 2017 (another zero percent growth year), 2018 and 2019. In other words, the reported “savings” are relative to inflated assumptions of future spending, rather than reductions to current spending levels.
Furthermore, the 3.5 percent increases in FY 2020 and FY 2021 could result in an average annual wage increase over the next four years (FY 2018–FY 2021) of 1.75 percent—which actually exceeds the inflation rate of each of the past four years! Even if the 0 percent wage growth in FY 2017 is factored in, the average wage growth over the five year span (FY 2017–FY 2021) would be 1.4 percent; this exceeds the average annual inflation over the prior five year period of 1.31 percent. Classifying this agreement as a budget cut is a bold misnomer. Inflation-adjusted wages likely grow throughout this period, even with the proposed temporary freeze.
The pension proposals within the agreement do represent notable improvement. Relative to current employee contributions levels, employee pension contributions for existing employees will increase by 2 percent of salary over two years. In addition, all new state employees will be enrolled in a hybrid pension plan, a plan which offers a lower defined benefit (DB) along with a defined contribution (DC) component. Employees must contribute at least 1 percent of pay to the defined contribution (DC) component; the state will match 1 percent. New employees will be required to contribute at least 5 percent into the DB plan—and up to 7 percent if annual returns dip below 6.9 percent. On top of improving the contribution system, the new plan prevents “overtime spiking,” a practice which allowed retirees to withdraw benefits far greater than their contributions. SEBAC estimates pension changes alone will save the state $11.7 billion through FY 2047. Reforms certainly are needed. According to Moody’s, Connecticut has the second worst funded public pension plans in the nation. The American Legislative Exchange Council report Unaccountable and Unaffordable 2016 ranks Connecticut’s funded ratio dead last in the nation, at 22.8 percent—a whopping $27,653 in unfunded liabilities per capita.
Another meaningful fiscal improvement centers on annual retirement Cost Of Living Adjustments (COLA). Going forward, any initial COLA will not occur until 30 months after retirement, more than double the current average initial adjustment. In addition, rather than automatically granting a minimum 2 percent COLA each year (even when inflation is less), COLA will only match that of Social Security COLA index; and this will be capped at just 2 percent annually unless inflation exceeds 3.33 percent. In exchange for the union concessions, the state agreed to refrain from mass layoffs. In addition, the agreement extends the health and benefits component expiration from 2022 to 2027. A similar extension occurred much earlier in Malloy’s governorship, when the expiration was extended from 2011 to 2017. The first extension eliminated the potential for the contract to be a dominate issue in the 2012 gubernatorial race. This second proposed extension effectively inhibits the ability of the next governor to influence a significant portion of the state budget.
In the end, the agreement will result in $1.5 billion in savings over the next two years compared with the originally projected state spending levels. But with a projected $5 billion deficit over the next two years, this $1.5 billion in savings represents just a partial budget solution for the state with the third worst credit rating in the nation. Locking the state into a contract for up to a decade could worsen, rather than alleviate, the fiscal crises. Simply embracing the pension reforms and a temporary salary freeze without this long-term benefits agreement is a more prudent course of action.
Connecticut clearly needs a new approach to budgeting—one that is priority based. A continuation of the status quo on so many elements of the public sector collective bargaining arrangement does not bode well for the state’s fiscal health. Let’s hope these modest reforms are but a start.