Sometimes there’s a fine line between kicking the can down the road and gradually phasing in difficult change. Not this year, not in Connecticut. The difference is a chasm. The sweetheart deal that Governor Malloy and his fellow Democrats in the General Assembly cut with state employee unions, the so-called SEBAC agreement, is protected by contract for a full decade —leaving meaningful reforms waaay down the road. The contract is the mother of all can-kicks.
Nevertheless, after the deal was struck, Republicans didn’t give up. They included in their own budget proposal several reforms starting after the expiration of the contract. Lo and behold, the GOP’s budget passed both houses of the Democrat-controlled Assembly.
Why in the world did Democrats in the deep-blue state of Connecticut vote for a GOP budget? Well, when the SEBAC contract came up for a vote in the Connecticut senate early last August, three fiscally conservative Democrats held out and voted yes only after receiving assurances from senate Democratic leadership that a twelve-point list of fiscal reforms would be instituted. Then, in the recent budget go-round, the Democrats included only three of the reforms in their budget, while the Republicans incorporated ten of the twelve. So the “threesome” voted for the GOP budget, which passed the senate by 21–15.
Five Democrats in the house of representatives followed suit, and the GOP budget passed the Democrat-controlled house by 78–72. Governor Malloy has vetoed the measure, arguing, amongst other things, that enactment of the reforms constitutes a SEBAC contract violation, even though the reforms take effect only after the expiration of the SEBAC agreement. Malloy & Co. say the budget risks an employee-union lawsuit.
So what happens now? Perhaps more Democrats will defect and the Assembly will override Malloy. If the Assembly Democratic leadership wants to block an override and pass their own budget, they’d better keep the reforms and bring the threesome back into the fold (along with their house colleagues). But wait, that runs the purported risk of a union lawsuit. On the other hand, can they pass a budget without the reforms — can they bully the threesome and the house fivesome into backing down, or buy them off somehow?
Even though the reforms take effect ten years hence, their impact is worth $322 million in
savings today, according to actuarial analysis. Even though they will be realized only in years 11 through 30 of the actuarial time horizon, they impact the schedule of payments over the whole 30-year horizon, resulting in the $322 million reduction in the state’s required contribution to the pension fund over the fiscal 2018–fiscal 2019 biennium.
That’s a huge amount, especially when you consider that the savings have been inflation adjusted at the 3.5 percent inflation rate used by the state actuaries Cavanaugh McDonald. At that rate, one dollar of savings in 2028 is worth only about $0.70 today, and a dollar in the 30th year, 2047, is worth only about $0.35.
Imagine the savings if those reforms were instituted now and realized for all 30 years, with the inflation-adjusted savings over the next ten years worth between $0.70 and one full dollar. Indeed, it would have been much better if the “threesome” had voted against the SEBAC deal in August. Not only would the savings have been much greater, but that would have avoided the anomaly of achieving savings by reducing funding of an already underfunded pension fund in the face of still mountainous obligations over the next ten years.
What are the key reforms? First, the GOP budget bill eliminates overtime spiking, i.e., calculating pensions based on overtime earned in the years immediately prior to retirement, as opposed to average overtime over a full career. Spiking allows soon-to-retire employees to log extensive overtime hours in order to inflate their pensions. Second, the GOP budget requires state employees to contribute to their own pensions at the nationwide average for public employees, presently about 7 percent of salary/wages (versus 2–4 percent under SEBAC).
Third, it eliminates cost-of-living-adjustments (COLAs) for post-2027 retirees until the pension fund reaches 80 percent (presently, Connecticut is only about 35 percent funded). Fourth, for employees with salaries near and above the Social Security “tax and benefit base” ceiling ($127,200 annual earnings), it eliminates a pension supplement that “makes up” for “lost” Social Security benefits near and above the ceiling. Finally, the GOP budget mandates that future labor contracts not have a term of more than four years.
These reforms introduce basic fairness. Overtime spiking is a notorious abuse. Two other reforms bring Connecticut employees in line with national averages. The fourth simply applies to the state’s retirement program the same needs-based philosophy that governs the federal Social Security retirement program. Indeed, even after these pension reforms, Connecticut state employees will still have far more generous pension and health-care benefits than most workers in the private sector, where pensions have all but vanished and health-care costs have skyrocketed.
If these reforms are included in the ultimate budget, we’ll see if the employee unions file a lawsuit. It would be a court fight worth having. If they are not included and the “threesome” caves and votes for the budget anyway, well, so much for political courage — indeed, voters may wonder whether “fiscally conservative” means anything at all when describing Democrats. all when describing Democrats.
Accountants CPA Hartford, LLC