Major concessions from current state employees are necessary

The last few weeks have been quite something in Connecticut.

Since July 1,the state has been in fiscal disarray, with no budget. On June 28,Aetna announced that it is following GE out of state, moving its headquarters to New York City after 160 years in Hartford.

Just before Aetna’s announcement, Governor Malloy signed his “concessions” deal with state employee unions, making the outlandish claim that the deal will produce an eye-popping $24 billion in savings over the next 20 years, including $9.5 billion in “wage savings.”

Malloy claims the deal and the rest of his budget proposal will close the state’s whopping $5 billion projected deficit in its $40 billion biennial budget, but his own projections show the state falling right back into deep deficits immediately thereafter. How do billions in longterm “savings” square with billions in deficits?

Besides, the governor is a lame duck. How can he engineer or claim credit for “wage savings” over the 18 years after his retirement — over the next five gubernatorial terms? For their part, how can current employees claim to be conceding 20years of savings? Many, if not most, will be retired and no longer receiving wages during the later years.

Future governors and future employees will negotiate future wages.

Even the “wage savings” in the early years aren’t genuine savings. The two-year wage freeze doesn’t involve paying employees any less, and the deal grants wage increases in the next two years.

Malloy asserts that “independent actuarial analyses” have found the $24 billion in savings. Nope. The text of the tentative deal reads “Wage estimates were developed by OPM (Office of Policy and Management, in the Executive branch),” not the state’s actuaries, whose only job is to analyze the state’s pension obligations, not to calculate, or assess the impact, of “wage savings.”

While there are genuine pension savings in the deal, almost all of them come out of the hide of future employees, a new Tier 4 classification whose pensions will be a hybrid of the current defined benefit plan and a new defined contribution 401(K) plan. Current employees are giving up virtually nothing on pensions.

Never mind that current employees are giving up almost nothing. The greater reality is that the “concessions” are too little too late in light of the state’s calamitous financial and economic condition. Reportedly, even some Assembly Democrats are coming to this realization.

The “concessions” over the next two years amount to only $1.5 billion, leaving a remaining deficit of $3.6 billion to be closed with more taxes and major spending cuts — right now, not in the distant future, not over 20 years.

Citizens and businesses in the private sector will take the hit right now, while current state employees escape almost unscathed. That’s fundamentally unfair.

Inevitably, those taxes and cuts will hurt the state’s already weak economy. Even in February, when the state was facing “only” a $3.5 billion deficit (before income tax revenue come up short in April as tax returns arrived), the governor’s budget document was forecasting about $2 billion in deficits for the three following years. Now that the two-year deficit is $1.6 billion bigger, the deficits in the next three years will be larger as well.

Indeed, the trends are negative. Fiscal 2017 income tax and sales tax revenue are coming in at $13.2 billion, below $13.4 in fiscal 2016. What if that downward trend continues? What if there’s a recession, as there will be before too long, since we are in a near-record eighth year of a national economic expansion?

Connecticut is in a death spiral right now, even before the eventual new budget brings the third round of major taxes increases under Malloy. Increasing taxes will accelerate the exodus out of state, narrow the tax base, require further tax increases and spending cuts, and so on.

To pull out of the spiral, there must be major concessions from current state employees, not additional concessions from future employees. And the notoriously overgenerous long-term pension and health-care benefits agreement (the so-called SEBAC deal) should absolutely not be extended another five years through 2027. Future governors will need flexibility to reverse the continuing deterioration in the state’s economic and fiscal condition.