Because bipartisan budget didn't curb labor costs it didn't fix problem

Connecticut’s budget arrived four months late, then almost immediately fell into deficit. Last week, the state announced a projected $325 million shortfall in its brand new, bipartisan $41 billion two-year budget signed by Gov. Dannel P. Malloy on Halloween.

Supposedly, the budget closed a gaping $5.1 billion deficit. Many greeted the bipartisan deal with amazement and relief.

In reality, the budget is nothing to celebrate. The document itself forecasts big future deficits, as can only be expected given the state’s sharply escalating public-sector labor costs.

The bipartisanship was a surprise, since Democrats control both houses of the legislature, as they have for all but two of the last 30 years. However, Republicans have nearly closed the gap. They shocked the political establishment by pushing a GOP budget proposal through the legislature in September — only to see it vetoed by the hard-left Democratic governor.

After Malloy’s veto, GOP and Democratic legislators constructed and passed the new budget by an overwhelming veto-proof four-to-one margin. So Connecticut had a truly bipartisan deal, but still a deeply flawed one.

While the budget appeared to close the current deficit, the budget document itself projected a plunge back into a deep $4.5 billion deficit in the next biennium and a deeper abyss thereafter. It fails to solve the state’s long-term problems. Now its short term validity is also in question.

Why? Because the budget closed the $5.1 deficit mostly with artful gambits, one-time gimmicks, and wishful estimates, instead of meaningful measures to address escalating expenditures on overgenerous public-sector pay and benefits.

While the budget includes $1.6 billion in “labor concessions,” overall state expenditures on public employees will increase by $775 million in the current budget.

The concessions are only “savings” according to the word’s meaning in government budgeting, i.e., reductions in the magnitude of a future increase rather than savings relative to prior spending levels.

Of the $1.6 billion in “concessions,” $715 million derive from a two-year wage freeze, in exchange for which union-friendly Malloy granted a four-year, no-layoffs guarantee. Wages will be the same — not less.

Expenditures for public employee benefit will increase robustly, since only modest “concessions” were included in the wage and benefits deal that Malloy struck last summer with the state-employee unions, revising the “SEBAC” benefits agreement. In the deal, Malloy agreed to an extension of the notorious SEBAC agreement to 2027, shielding overgenerous benefits with strong legal protection for a full decade. The legislature approved the deal in a strict party-line vote with Democrats in favor, Republicans against.

In the next biennium, wages and benefits expenses will explode. Wages will increase about $625 million to roughly $9.9 billion, given two annual 3.5 percent raises agreed in the SEBAC deal. With escalating scheduled pension-fund contributions and assuming only a 4 percent increase in health-care costs, total health and pension expenditures will jump $1.3 billion to $10 billion, more than 33 percent above the level in the two fiscal years that ended last June.

The SEBAC benefits agreement is fiscally unsustainable. Major corporations have recognized as much and departed — GE, Aetna, and, most recently, Alexion. In 2018, Bristol Meyers Squibb will join the exodus.

These departures exacerbate the fiscal woes that triggered them. Conventional income, sales, and corporate tax revenues have flat lined recently, despite (or due to) two huge tax increases under Malloy. Loathe to increase tax rates yet again, legislators, instead, laced the current budget with about $350 million in less obvious tax increases in the form of reduced or canceled tax deductions, credits, and exemptions.

There’s also a $330 million increase in net revenue from the maximization of a complex tax maneuver under which the federal government over-reimburses states for taxing, and then redistributing tax revenue to, health-care providers to enhance Medicaid coverage. Federal funding is increasing about $750 billion under the scheme. That kind of money might lead Congress to consider modifying Medicaid policy.

Beyond taxes, the current budget employs a variety of one-time measures. For example, the budget sweeps about $300 million from various special-purpose accounts, including green-energy-subsidy accounts funded directly through charges on utility customers’ bills.

Of course, these one-timers cannot help in the next biennium. On the tax side, Connecticut provides an illustration that constantly increasing taxes may not overcome an eroding tax base. The new bipartisan budget itself projects that overall revenue will decline in the next biennium, dropping by $1.5 billion to $39.8 billion.

A few brave Republicans voted against the new budget because Democrats and the unions nixed several pension reforms proposed to take effect after SEBAC agreement expires in 2027. These reforms had been part of the budget passed in September. Despite their delayed effectiveness, the state’s outside actuaries had valued the reforms at $270 million in the current biennium and $10 billion over 30 years.

Most Republicans voted for the budget because it contains new formulaic caps on spending and borrowing. These restraints would have had great effect if enacted a decade ago. Now, less so, since the new spending caps exempt expenditures on unfunded public employee pension obligations. Moreover, one spending cap is tied to inflation and the state’s personal income level, which are increasing, however slightly, while the real problem is declining aggregate tax revenue, which will serve as the real brake on spending.

The other spending cap is tied to expected revenue (which, as just noted, is declining). The governor and the legislature can beat this cap and increase spending simply by raising taxes, which they will have to do just to maintain, or moderate cuts in, non-compensation spending, i.e. essential services for citizens.

When it mattered, on the SEBAC deal, there was no bipartisanship. Malloy, the Democrats, and the unions were zealous in protecting state employees to the detriment of Connecticut’s citizens.

Connecticut’s outlook is dire with both the current and future budgets plunging into ever deeper deficits. The problem is crystal clear: unaffordable public sector pay and benefits. The legislature cannot ignore this problem any longer. It should pass legislation immediately implementing the post-2027 pension reforms that were included in the September budget. That should be the first step in facing down the powerful SEBAC unions, which threatened to sue if the September reforms were instituted. A confrontation with the unions is inevitable. Better sooner than later.

A version of this column appeared originally in National Review Online. Red Jahncke is the president of Townsend Group International, a business consultancy in Connecticut, and a freelance columnist who writes on public-policy issues.

 

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