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Robbing other needs to pay state pension fund obligations

Governor Lamont unveiled his proposed Connecticut Comeback budget last week. A comeback is unlikely given the long-festering problem of overgenerous and woefully underfunded compensation for privileged state employees. Yet, politicians in Hartford won’t even identify the problem by name, instead, referring to it as the state’s “structural” or “fixed cost” problem.

It is anything but fixed, because it is consuming more of the budget every year – approaching one-third of the $23 billion budget for next fiscal year ending on June 30, 2022.

For over a decade, state employee compensation has exceeded compensation in Connecticut’s private sector by about 40%, the biggest gap in the nation. The consequence is that the State Employee Retirement Fund is drastically underfunded. It is difficult to fund such wildly overgenerous benefits, especially since the state didn’t even start to fund them until decades after beginning to award them.

What now is an ongoing gravy train for veteran state employees and retirees is ultimately a train wreck for them and the state. There are only three ways to avoid the wreck: (1) massive tax increases and/or service cuts, a dubious option (2) significant cuts in state employee benefits and/or (3) a federal bailout.

Sure enough, taxes have gone up. Services are being squeezed. Yet, the gravy train rolls along. A major federal bailout is already in hand. A much larger one seems at hand. It may pay off the problem.

Absent Uncle Sam, the state’s fiscal woes are playing out within the constraints of automatic fiscal controls instituted in the 2017 “bipartisan budget.”

The spending cap limits growth in most state spending to the greater of inflation or growth in personal income in Connecticut, resulting in a 3% annual cap in Lamont’s budget. The cap’s rationale is simple and prudent: don’t spend more than the state economy can support and its citizens can afford. Any excess revenue goes into the Budget Reserve Fund, AKA the "rainy day” fund.

The volatility cap applies to income tax revenue from investment income, which gyrates with the stock market. Any such tax revenue over $3.115 billion (adjusted for inflation) must be deposited into the reserve fund. The idea is to save some of the gushing revenue from bull markets (the last four years) and save it for the lean years of a bear market.

This coming fiscal year, a revenue cap begins to send funds to the reserve fund, initially 1% of revenue and increasing thereafter.

Funds have piled up for that rainy day, which brings us to a fifth unnamed cap: the reserve fund is capped at 15% of the budget. Overages go into the state and/or the Teachers Retirement funds. This year’s overage is projected at a whopping $425 million.

This is a good thing and a bad thing. Good because both the state and teacher retiremennt funds are drastically underfunded, recently as the result of both Lamont and his predecessor, Dannel Malloy, reducing state contributions with the approval of union leaders.

It is a bad thing when you remember that the state retirement fund pays overgenerous retirement benefits. Why not reduce the benefits to national average levels? That would improve the health of the retirement fund in a much fairer way.

There’s little fairness between state employees and the private sector workers. State employees have enjoyed a decade-long no-layoff guarantee, while hundreds of thousands of private sector workers have lost jobs in the shutdown.

State employees have received two 3.5% pay raises plus two 2% “step increases” in the last two years, for a combined compound 11.3% pay raise.

To bring it full circle, when a huge chunk of the budget (state employee pay) increases 11.3% and the spending cap limits overall budget growth to only 3%, that means most of the rest of state spending must be reduced. State employee pay is squeezing out state services.

Yet, state employee union bosses are screaming bloody murder, because Lamont’s budget doesn’t include any more pay raises.

Union members should worry more about their retirement benefits. For the first five years through July 2022, the state contribution to SERS is exempt from the spending cap; thereafter, it isn’t. Moreover, Lamont is requesting another $100 million reduction in the state’s contribution to the retirement fund, proposing to “extend SERS amortization transition by 3 years.”

If union leaders agree, the fund will suffer; if they don’t, the squeeze on state services will worsen.

Either way, there is little prospect of a Connecticut Comeback until union members agree to renegotiate their pay and benefits. With over 100,000 active and retired state employees, modest concessions would generate a substantial amount in aggregate.

Red Jahncke (Twitter: @RedJahncke) is president of The Townsend Group Intl. LLC, a Connecticut business consulting firm. He is an occasional contributor to The Day opinion pages.

 

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