Hartford — Gov. Dannel P. Malloy set the stage Wednesday in his 2017 State of the State address for a protracted and difficult debate on how to further shrink state government, extract more concessions from unions on pension and health benefits, and better focus a smaller pool of state aid for education on the systems most in need.

After recently negotiating significant changes to how the state will pay down its unfunded pension liability, Malloy alerted a half-dozen labor leaders before the speech that he will be seeking unspecified concessions that he says must be part of “a responsible and balanced solution to our budget problem.”

“These changes can and should be reached respectfully, and at the bargaining table,” Malloy told a joint session of the General Assembly. “Our state must honor its legal obligation to our public servants and state retirees, while at the same time keeping our promises to Connecticut taxpayers.”

In his seventh speech marking the opening of a General Assembly session, the Democratic governor eschewed his usual practice of pitching new initiatives, instead emphasizing concessions, the size of government and local aid as three broad areas he sees dominating a session certain to hinge once again on the struggle to balance the budget in a state not fully recovered from the Great Recession of 2008.

A former mayor of Stamford, Malloy largely has sheltered local aid from cuts, but that appears impossible in 2017. He emphasized changes in how aid is calculated, glossing over what legislators and local officials suspect also will be a smaller pool of aid.

“The state provides a total of $5.1 billion in municipal assistance. That’s more than one fifth of our overall budget this year, making it our biggest single expense — not state employee pensions, not Medicaid, not debt service, not salary and benefits of our employees; town aid accounts for the largest portion of our state budget,” he said. “It simply would not be fair for us to talk about continued state agency reductions, or talk about the need for labor concessions, without talking about new ways to provide town aid.”

The speech is a prelude to the budget he will submit in February to a General Assembly much changed by the 2016 elections, when Republicans gained three seats in the Senate and eight in the House, largely by running against the Democratic governor, the Democratic majority, the state’s economy and its chronic fiscal pains.

The Senate now is divided evenly, and House Democrats will be hobbled by the smallest working majority in the history of the chamber. The GOP has to decide whether it will try to shape and take some ownership of the budget, keeping one eye on 2018, when it hopes to capture both chambers for the first time since 1984.

Unable to resolve the state’s fiscal challenges in his first six years, Malloy made a virtue of “predictability” he says he’s brought to Connecticut.

He touted previous pension changes and his administration’s steps to preserve the vital aerospace industry by striking bipartisan deals with the corporate parents of Pratt & Whitney and Sikorsky Aircraft, the sources of direct jobs and a vast supply chain. He mentioned how Electric Boat is thriving once again.

“Together we’ve protected Connecticut’s aerospace and defense industries for a generation and likely beyond. More importantly, we’ve given these employers, and the tens of thousands of employees who work for them, something that is vital in today’s world: We’ve given them predictability,” Malloy said. “We know that predictability creates confidence. And we know that confidence creates growth.”

But Malloy’s call for labor concessions is the harbinger of a difficult year.

He gave no hint of whether his proposed budget next month will be balanced by assumed concessions, as it broadly was in the first budget he proposed after taking office in 2011, when he was confronted by a mammoth deficit left by Gov. M. Jodi Rell and the 2010 legislature.

His budget director, Ben Barnes, told CT Mirror last month that without union concessions, avoiding major tax increases would require layoffs and significant cuts to municipal aid, social services and higher education. Barnes’ statement fell flat with labor last month, as did Malloy’s speech Wednesday.

“A lot of politicians throw about the phrase ‘shared sacrifice,’ but we have not seen it,” said Lindsay Farrell, director of the labor-supported Working Families Party. “We have seen a lot of sacrifices from workers, but we’re still not asking the people and entities who can afford it to do their part.”

Farrell and Lori Pelletier, the president of the Connecticut AFL-CIO, suggested that Democrats’ losses in November were caused by labor’s coolness to them in 2016, not the broader electorate’s anger over the economy.

“We saw the Democrats in the legislature not stand up to Gov. Malloy last year, and there were a lot of electoral consequences,” Farrell said.

“I think that every legislator in this building was watching those election results very closely,” said Pelletier, who called the governor’s address “disappointing.”

“There should have been another part to his speech,” she added, “tax fairness.”

“As always, our union is willing to work with state elected leaders to find a way forward in a difficult economic environment. Our members do important work and are an economic asset,” Sal Luciano, executive director of AFSCME Council 4, wrote in a statement posted on the union’s website. “But we are not willing to be scapegoats or political cover for legislators unwilling to make better choices. We are not willing to abandon our defense of public services — and the women and men who provide them — that make Connecticut a great place to live, work and raise a family.”

Malloy was praised by the state’s chief business lobby, the Connecticut Business and Industry Association. Joseph F. Brennan, the group’s president, said no one wants public-sector workers vilified, but rather taxpayers want government to recognize it must reduce its cost of operations.

“There’s no other choice at this point,” Brennan said, adding that wage and benefit concessions must be discussed. “You have to find ways to cut costs, and you’re not going to cut enough costs just through efficiencies.”

Labor leaders have complained that workers ratified major concessions deals in 2009 with Gov. M. Jodi Rell and again in 2011 with the newly elected Malloy. Their solution is to ask more from the wealthy and to slash subsidies and breaks for business.

Analysts are projecting an 8 percent deficit, about $1.5 billion, in the coming fiscal year. In 2011, Malloy faced a shortfall of $3.7 billion. Then, as now, Malloy said he had no choice but to make demands of labor.

“I don’t make these suggestions to be antagonistic. Just realistic,” Malloy said in 2011, asserting that the alternative would be to “shred” social services and to lay off thousands of workers. “Which is to say there’s no alternative. We have to get it done.”

In the years since, he has shrunk state government, and the labor allies who helped elect him in 2010 and re-elect him in 2014 still are angry by the passage last year of an austerity budget.

Malloy is expected to seek, at a minimum, higher employee contributions for pensions and retiree health. Contribution levels are less than in the private sector, while the level of benefits is generally competitive, depending on who is doing the evaluation.

A bigger problem is the historic debt. While critics complain that Malloy’s deal with the unions to avoid unaffordable contributions over the next decade is shifting a burden onto Connecticut’s children, the reality is current taxpayers are facing a tab left by their grandparents’ generation.

“Connecticut’s state pension systems were created 80 years ago, but not a single dime was deposited into the account during the first 30 years of its existence. It was a pay-as-you-go system,” Malloy said. “Over many decades, legacy costs, insufficient contributions, lower-than-assumed returns, and early retirement packages left us with a significant unfunded liability in the state’s employee and teacher retirement systems.”

Malloy said the state has been making necessary contributions since 2011 to fund the retirements of current workers, but filling the gap left by decades of underfunding the pensions of retired workers will take time.

He urged legislators to support the pending deal with unions that spreads out those payments on an affordable schedule. He said that deal “will make our pension payments more affordable, and yes, more predictable.”

“Independent analysts are taking note. Moody’s Investors Services, a national credit rating agency, deemed this to be ‘a credit positive’ step for our state,” Malloy said. “And the plan’s actuaries say these changes will ‘enhance the stability’ of our pension system.”

Malloy promised Wednesday to deliver new funding formulas for education, meeting a challenge laid out last year by a Superior Court judge in a school funding lawsuit now before the Connecticut Supreme Court.

“Connecticut needs a new way to calculate educational aid — one that guarantees equal access to a quality education regardless of zip code. Our state constitution guarantees it, and our moral compass demands it,” Malloy said.

He gave broad hints on what he might propose.

“We need a formula that appropriately measures a given community’s burden. A formula that recognizes specific challenges faced by local property taxpayers. And a formula that takes into account the impact those challenges have on the education provided to our children,” Malloy said. “The budget that I will present to you next month will outline a more equitable system for providing town aid. It will be based on the local property tax burden, student need, and current enrollment.”

His remarks were greeted with cautious praise from the Connecticut Conference of Municipalities, especially Malloy’s acknowledgement that public education is a state constitutional right.

“We talk about aid for education as state aid to municipalities,” said Joe DeLong, the president of CCM. “But education is the state’s responsibility, not the towns’.”

Senate President Pro Tem Martin M. Looney, D-New Haven, said there is money to be saved by regionalizing small school districts.

“We can’t assume that we are going to continue shelling out money to towns who are all going to maintain all those independent small school districts. The time has come, I think, for the consolidation of small school districts,” Looney said. “When money is as tight as it is, we can't assume the status quo.”

Danbury Mayor Mark Boughton, a Republican exploring a run for governor in 2018, said he hopes the state finally fixes how schools are funded.

“We have been talking about it for years,” Boughton said. “Where the rub is going to be is in that chamber and how those changes play out. It’s going to take courage.”

Adjusting those formulas in such a narrowly divided General Assembly, where many of the newly elected represent suburban and rural districts, may be even more difficult than a proposal for higher taxes. If nothing else, Malloy shared enough of a vision Wednesday for varied interest groups to mobilize in the month before he proposes his budget.

But vision is the easier element of politics in a time of bad budgets and a narrowly divided legislature. With a low approval rating and the expectation he will not seek a third term in 2018, Malloy has little political capital to expend.

Complicating his task are Democratic legislators fearful of losing power and Republicans hungry to seize it.

“Next month, I am going to come back to you with more details on the topics I laid out today: about how government should continue to become smaller and more effective; about how we can continue working with our partners in labor to create a sustainable benefit system that we can afford not just now, but into the years ahead; and about why we should find a fairer way to fund public education, so that we can ensure dollars are going to where they are needed most,” Malloy said.

“All of it will be geared toward building a more predictable budget and a more sustainable Connecticut economy,” Malloy said. “We are in this together, and together we shall prevail.”

Jacqueline Rabe Thomas contributed to this report.

Keith M. Phaneuf and Mark Pazniokas are reporters for The Connecticut Mirror (www.ctmirror.org). Copyright 2017 © The Connecticut Mirror.

mpazniokas@ctmirror.org

kphaneuf@ctmirror.org