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    Friday, May 24, 2024

    Connecticut’s untouchable third rail

    Last week, there was a hearing in Hartford reviewing the investment performance of the state’s two big public pension funds. There was much self-congratulation. One newspaper headline trumpeted: “CT pensions hit $55B with a strong ’23 but debate rages over how we stack up.

    First, hitting $55 billion in assets is meaningless. What matters is whether those assets are sufficient to cover future pension costs. They are not. Second, there’s no debate about “how we stack up.” Poorly. The inadequate funding of the state’s big public pension funds places Connecticut — again — in the bottom five of the 50 states.

    There was no mention at all of one major factor impacting “how we stack up,” namely the rapid rise in state employee wages under Democratic Gov. Ned Lamont. Talking candidly about state employee compensation is the third rail of Connecticut politics. No one wants to touch it, least of all Lamont and fellow Democrats who rely upon public unions for reelection.

    Yet, it is the elephant in the room. Since pensions are calculated off wages, future pension costs rise in tandem with growth in wages. If Lamont’s proposed 4.5% raise for state employees next year is approved by legislators, state employees will have received a 33% compound raise during Lamont’s time in office, and that’s not counting $3,500 in “pensionable” bonuses and an average of $1,000 in pandemic pay.

    It will take extraordinary investment performance just to keep up, much less improve the bottom-five standing of SERS, the state employee pension fund.

    Recently, the subject of Connecticut’s finances arose when a young Connecticut father asked me at my granddaughter’s birthday party where the state’s income tax revenue goes, considering that he could see no difference in state services between Connecticut and New Hampshire, which has no income tax. I replied that it goes into state employee compensation and followed up with a column comparing Connecticut and New Hampshire. The column cited the most recent study of state employee compensation in the 50 states. The comparison was stark. The spread between state employee and comparable private sector worker compensation in Connecticut was $26,894; in New Hampshire, $20,150.

    Since New Hampshire has no income or statewide sales tax, its cost of living is much lower. Reflecting the cost-of-living difference, the compensation differential between state employees in the two states was stunning. In Connecticut, active state workers received an annual pension fringe benefit (normal cost) worth $14,357; in New Hampshire, $8,489. In Connecticut, they earned a retiree health benefit worth $16,637, the highest of the 50 states and more than triple New Hampshire’s $5,529.

    The study is based upon broad survey data from 2017 to 2019 from the Census Bureau and from the National Income and Product Accounts. So, I looked for more current data. The Census conducts an annual survey of state and local governments. For 2022, it shows that state employees in Connecticut earned wages of about $89,000 on average, versus $69,000 in New Hampshire.

    The Census survey pegs Connecticut’s full-time equivalent workforce at 56,000, so, if the Nutmeg State paid its workers what the Granite State pays its state employees, it would save about $1.1 billion per year. That’s just wages. Let’s say fringe benefits push the total to $2 billion.

    That’s before Lamont awarded unionized state employees four annual 4.5% wage increases (one pending and one being for fiscal 2023 which was paid retroactively in calendar 2023, missing the Census survey). With the effect of compounding 4.5%, the $2 billion becomes $2.4 billion per year in just four years.

    A cash flow analysis of SERS provides another revealing perspective. Since June 2018, just before Lamont took office, the unfunded liability (future pension costs that are not covered by assets) declined (improved) by only $1.1 billion, from $21.2 billion at the end of fiscal 2018 to $20.1 billion at last fiscal year end, June 30, 2023, according to the latest Valuation Report of the independent actuaries, Cavanagh Macdonald. That’s not progress after adding $5 billion of special deposits resulting from the fiscal guardrails that Lamont is fond of bragging about.

    Here's what happened. While SERS assets increased from $13 billion to $21.8 billion, the future pension liability increased from $34.2 billion to $42 billion. Since the actuaries did not change their methodology and the number of employees actually declined about 2,000, the increased future pension liability can only result from higher wages which the actuaries compute will turn into much higher future pension benefits.

    If state legislators have the courage to touch the third rail and reject Lamont’s new 4.5% wage bump for state employees, the employees will still have received a 27% compound wage increase over the six years of Lamont’s time in office. That should be enough. Rejection might begin to bring Nutmeg State employee compensation in line with national norms, something elementally fair. It might begin to improve the funding level of SERS, something fundamentally prudent.

    Red Jahncke is the founder and CEO of Connecticut-based The Townsend Group International, LLC. He is a nationally recognized columnist who writes about politics and policy.

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