Yes it does! No it doesn’t! Yes it does! No it doesn’t!

(cross-posted from CTNewsjunkie)

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 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 of 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 or more that can be used to cover up any shortfall that may occur from the $1.6 billion concession package.

Second, while Governor 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 schedule 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 starting with 1/2 of 1 percent in FY ’13, 2 percent in FY ’15 and 3% in FY 15.

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 the 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.

  • Sharewhut

    “A little secret about how to determine who is telling the truth”
    No secret. Lips moving? Not the truth.
    Just waiting for, when the numbers are confirmed to not add up, Malfoy comes back demanding that state employees make whole for their $700 and $900 million ‘shares’ under penalty of layoffs..

  • Steve

    The tax to fund the Retirees Health Trust Fund begins @ one-half of a percent in ’13, then jumps to 2% in 2014, before maxing out at 3% in 2015. It’s unclear to me if the tax in ’13 and ’14 counts towards the 10 years limit. But, I predict that it will become a moot point as this tax is made permanent. On CT-N, Ben Barnes said that this tax will be open for renegotiation. It shouldn’t be so hard to balance the budget so long as discipline is retained. There’s a huge pool of senior state employees not far from retirement, though I wonder if the screwing that the seniors got may delay their retirement, making it harder for them to get the numbers they need to retire in relative comfort. There’s a huge surplus of management, when comparing management-nonmanagement ratios between private and public sectors. In state employees’ minds, the biggest loophole in the no-layoff guarantee are recissions. Malloy has said that recissions will be made. If the state economy continues to remain deep recession, I expect bigger recissions. I’ll be laughing at you state employees as the unions pee their collective pants to get you to vote ‘yes’, for the next concessions, in 3 years- 9 months. And keep on voting yes, again, and again.

    • jonpelto

      Steve – thanks for correcting the information on the 3% payment into the fund. I forgot about the phase in and corrected that and the dates on the blog.

      And yes… you are probably right… about ti ending up being a permanent addition to the “compensation package.”

    • iamjh

      “I’ll be laughing at you state employees as the unions pee their collective pants to get you to vote ‘yes’, for the next concessions, in 3 years- 9 months. And keep on voting yes, again, and again.” – Steve
      Would that actually be funny to you,Steve? You’d enjoy that?

  • Norma

    I would like to know if ALL state employees are going to be required go pay this 3%. And when I say ALL, I mean legislators, the governor, the B Barnes’s, the Calhoun’s, the Occhiogrosso’s, the whole lot of them…??
    I would like to know if there will be exceptions… And I’d love to know if the guvs office will have a wage freeze like the rest of us. He did after all increase his office salaries 41% and his staff by 20%.
    Shared sacrifice my butt.

  • Of course Jonathan is wrong about the benefits of a Wall Street revival (which probably won’t happen anyway). Folks working in NY typically pay no income tax in CT, except on non-wage income. This because NY tax rates are significantly higher, especially if you work in the City. Moreover, because Wall Street has shifted more to salaries and moved away from bonuses, there is less non-wage income for CT to tax.

    Add to that the significant high wage job losses with UBS moving back to NYC and Pfizer shifting 1600 or so to Cambridge, FY 2012 is going to be a lot closer to the edge than this discussion suggests.


  • Sharewhut

    Gotta luv Council4, they’re not afraid to be clear when they stand up for their people, even if it’s contrary to what they didn’t stand up for with some of their other people! Once again, from the highlights on their newsletter-
    “But, Ed Thibodeau, staff representative for Council 4, said the Stewart proposal requested too much from union members.
    They were asked to give up raises, have (five) furlough days and more insurance costs,” Thibodeau said after the vote. “He’s (Stewart) asking for more than we are used to seeing. This is a lot more than what is normally asked of a bargaining unit.”
    Would think that statement coming from C4 would call for shared sacrifice by the workers, “how could they turn this down?”,”they just don’t understand” etc.
    Instead, C4 will fight tooth & nail for these guys and any other non state units because they beat enough out of state workers to keep the municipal aid flowing that the $$ should be there to give them.