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ANALYSIS | Who Is Telling The Truth About Labor Savings?

by | Aug 20, 2011 8:44pm () Comments | Commenting has expired | Share
Posted to: Opinion

Yes it does! No it doesn’t! Yes it does! No it doesn’t! That summarizes the dispute over the “value” of the $1.6 billion dollar concession agreement.

A little secret about how to determine who is telling the truth.

Reading the back and forth between Office of Policy and Management Secretary Ben Barnes and House Minority Leader Larry Cafero you’d think you were listening to an argument between two 10-year-olds on a playground.

OPM Secretary Barnes recently told reporters that he is “100 percent confident that the deal will yield $1.6 billion: $700 million in savings in the fiscal year that began July 1 and $900 million the following year.”

Cafero, using data provided by the non-partisan Office of Fiscal Analysis, says Barnes has inflated the number and there is no way that the state is going to achieve that level of savings.

After that it quickly deteriorates into name calling.

Meanwhile, Gov. Dannel P. Malloy has risen above that fray to repeatedly point out that this labor agreement is the structural change Connecticut has needed to get back on track.

As is so often the case in American politics, the two sides are trying so hard to argue their respective positions that they have — at least to some degree — bypassed the truth.

The fact is, the Malloy/SEBAC agreement will NOT lead to $1.6 billion in savings over the next 22 months. But that doesn’t mean that the Malloy administration can’t provide a balanced state budget for this year and next.

First off, the governor and legislature have built a significant surplus into this year’s budget to help balance things out should additional dollars be needed to cover expenses next year, which is an election year. While it is hard to tell exactly how much extra has been built in, between excess revenue and funds hidden in various accounts — such as the post-employment healthcare line — there could be a quarter of a billion dollars or more that can be used to cover up any shortfall that may occur from the $1.6 billion concession package.

Second, while Gov. Malloy has repeatedly said (even this week) that he will not allow any additional taxes to be raised, Barnes, his budget director, is very open about the need and likelihood of raising additional fees to access certain services.

Third, thanks to Connecticut’s second gas tax (the wholesale tax on gasoline), the high gas prices continue to produce a windfall of revenue for the state. Rather than use those extra funds to pay for transportation expenses, the dollars are going into the General Fund where they can be used to help balance the budget.

Fourth, while Wall Street has taken a real hit the past couple of weeks, any recovery there will help push up state revenues since Wall Street bonuses and pay increase income tax receipts.

And finally, while the governor’s super authority to cut the budget evaporates on Sept. 1, he will continue to have his traditional statutory authority to cut up to 5 percent of any given line item in the budget (except municipal aid). He can and will use this power to cut programs and services to make sure the budget is balanced.

So while the state may not get $1.6 billion in savings from the concession package, it certainly helps the Malloy administration balance the state budget.

But the bigger issue is that Malloy has been clear from the start. This concession package was not about simply balancing the budget. Malloy has consistently said it was about forcing structural change.

The term “unsustainable” has been Malloy’s second most-used phrase behind “shared sacrifice.”

At Thursday’s press conference, Malloy said, yet again, that “the real significance of this agreement lies in the long-term savings it produces for taxpayers and the state of Connecticut,” and that what he negotiated with the unions will create the “systemic change” that will create a sustainable relationship with Connecticut’s state employees.

So what are the elements of that long-term relationship?

(1) Unfunded Pension Liabilities:

As of June 30 Connecticut’s state employee pension fund needed an additional $12 billion dollars in order to fully fund its obligations. Reduce the total liabilities of the State Employees Retirement Fund by the total assets and you have the figure that is called the unfunded liability.  Most states maintain a funding ratio for their employee pension funds of between 75 percent and 125 percent. Connecticut had a funding ratio of about 52 percent before the economic downturn and before former Gov. M. Jodi Rell, SEBAC and the legislature agreed to defer a couple hundred million in pension payments in order to balance the budget over the last few years. The latest estimate is that Connecticut funding ratio has dropped us to the absolute bottom of the list with a pension fund ratio of only 46 percent.

If Malloy is correct and the labor agreement provides for significant structural change then the state’s pension fund liability should drop dramatically and the state’s funding ratio should go up dramatically.

The next regularly scheduled actuarial report isn’t due until June 30, 2012, but the Malloy administration could strengthen its credibility on this issue by having an actuarial assessment done now to see if the changes are really as significant as he says they are.

By the way, the underlying problem is that about 75 percent of the state’s liabilities are due to Tier I retirees and employees (or other existing retirees). Over 88 percent of all Tier I employees have already retired. Furthermore, since the labor agreement did not impact Tier 1 employees and only penalized the far less generous Tier II and Tier IIA retirement employees, contrary to what the Governor and Secretary Barnes have said, it is unlikely that this agreement has dramatically reduced Connecticut’s long-term pension obligation.

(2) Unfunded Retirees Health Benefits:

The other major long term state employee related state obligation is the retiree health benefits.

The state of Connecticut has not put ANY funds aside to pay for these required future expenses and instead has opted for a “pay-as-you-go” system in which the state only allocates enough money each year to pay for that year’s out of pocket expenses for retiree health insurance.

As of last June the unfunded liability for retiree health benefits was projected to about $27 billion dollars. 

The labor agreement does include a provision requiring all state employees to pay 3 percent of their salary for a period of 10 years into a new retiree healthcare fund that would then be used to over-set the existing $27 billion state liability. 

The 3 percent payment - a year for 10 years - was implemented for younger state employees as part of the previous Rell/SEBAC agreement.  The Malloy/SEBAC agreement would expand that program for all state employees beginning in 2017. 

The 3 percent a year would equate to about $224 million a year. Over 10 years this would provide $2.24 billion or (if I have done my math correctly) about 8 percent of the funds needed to cover the existing liability. The Malloy/SEBAC agreement does require that the state deposit an equal amount into the new fund.  Not counting for the benefit of compounding, the new play means that employees and the state would be putting in about 16 percent of what is needed over a 10 year period.  While that is a critical step forward it doesn’t provide for funds necessary to cover the costs that they state is obligated to pay.

In any case, as with the state’s long-term pension obligation, instead of bickering about who is right and who is wrong, the Malloy administration could put an end to this whole debate by ordering an actuarial assessment on both the state’s pension obligation and the state’s healthcare obligation.

In that way, the public could have the information necessary to look past the Barnes vs. Cafero argument and judge whether the Malloy administration is or is not accurate when it says this agreement deals with what the governor has called the unsustainable relationship with its employees.

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Comments

(6) Archived Comments

posted by: ... | August 21, 2011  12:13am

...

I gotta say this has probably been the best (in my opinion) and least biased assessment of Malloy’s work from you Mr. Pelto since his entering office. Or in the very least, since his union deal was released.

posted by: GoatBoyPHD | August 21, 2011  2:33pm

GoatBoyPHD

I do think a second opinion of the actuarial reality of the pensionis as it obligations over the next 30 years is necessary.

I can wait until next year as long as it is issued before the election. Last year they held it back a month and there was a new firm doing the projections.

http://www.ctmirror.org/story/8679/state-pension-debt-hits-22-year-low

The problem with yearly updates or course are the timing distortions. Nappier gave her unofficial update for 2010-11 and then the market tanked and ate all those gains in 6 weeks. I’m content with the monthly updates at her site.

http://www.ctnewsjunkie.com/ctnj.php/archives/entry/2011_pension_fund_investment_return_highest_in_23_years/

What I’d like to see are 5-year tables showing the number of projected pensioners versus actual employees as well as the projected unfunded liability and balance under various average return scenarios ranging from 2% annualy to 10% in 2015, 2020, 2025, 2030, 2035, etc.

posted by: SocialButterfly | August 21, 2011  5:45pm

Who wants to believe that the Governor and Legislature has built a significan surplus into this year’s budget to help balance things out should additional dollars be needed to cover to cover expenses nest year, which is Election Year?  Gov. Malloy and the General Assembly—are capable of wiping out a surplus.

posted by: JAM | August 22, 2011  8:29am

@ Goat Boy: You’re correct about reviewing the projected rates of returns. At an assumed 8.25% ROI,which has not been realized by the trusts, the unfunded liabilities and the necessary contributions continue to be understated.
Also let’s not forget the Teachers’ Pensions which had an unfunded liability of $11+ Billion (or 44% funded) as of June 2010. This was an increase of $2 Billion despite the infusion of $2 Billion in Pension Bond proceeds.

posted by: OutOfOutrage | August 22, 2011  10:11am

OutOfOutrage

Great article!  I’ve been concerned about this for some time and it’s nice to see some attention being paid to it.  I hope you do a follow up on the results of the 2012 report or any earlier report that might be generated.  I’d like to read your analysis of it.

posted by: JAM | August 23, 2011  7:23am

The numbers in my prior post were incorrect (I mistakenly cited the State Employees #‘s).
As of June’10, the Teachers had unfunded liabilities of $9 Billion, up from $6.5 Billion on ‘08 (61.42% funded ). Thus, despite the $2Billion infusion of bonded funds, the unfunded liabilitity still rose $2.5 billion, or 38+%.
And as with the other pension trusts, the assumed ROR is 8.25%.

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