Declining Revenue Will Meet Higher State Employee Costs

Red Jahncke (Photo courtesy of the author)

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Ned Lamont won a convincing victory in last week’s election. Congratulations are in order. Citizens should extend him the same honeymoon that his challenger would have enjoyed.

Yet, we must turn our attention to the future and the looming challenges we face.

First, the state is facing a serious decline in revenue.

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Second, even before we know the true cost of the SEBAC 2022 wage deal, state employee unions are going to come looking for improvements to the benefits side of their contract, which expires in 2027.

Labor always wants more, despite that Connecticut state employees already enjoy among the most generous benefits in the nation. Their health care benefits are the most generous in the nation by far. The negotiations are going to be tough and consequential.

Third, Eversource has warned that electric rates are going to increase 40%, and that comes on top of the state’s already very high energy costs. Can citizens and businesses afford the rate hikes?

On the revenue side, Lamont was extraordinarily lucky in his first term, though he campaigned as if he had single-handedly saved the state, claiming to have turned a $4 billion deficit into a $4 billion surplus.

Lamont was simply in the right place at the right time as three factors combined to improve the state’s situation.

First, a torrent of federal COVID assistance money gushed into all 50 states, without any effort by state or local officials.

Second, the stock market enjoyed a four-year rocket ride. This produced ginormous capital gains. Individual income tax revenue from the state’s outsized population of wealthy investors flooded into the state’s coffers, without any action or effort on Lamont’s part.

Third, this gusher of individual income tax revenue was diverted from spending and used to reduce the state’s massive unfunded liabilities – diverted by automatic fiscal restraints (mainly, the Volatility Cap, for interested budget wonks) that were imposed in the 2017 bipartisan budget agreement – an agreement struck months before Lamont even announced his run for his first term.

Now, all three of these factors are reversing. The last tranche of federal COVID assistance money will soon have been spent. The stock market has fallen off its rocket and into a bumpy downhill slide. Although it has rebounded recently, it will be down for the year. So, there will be no gusher of capital gains tax revenue. With other revenue also declining – most economists predict recession in 2023, the fiscal restraints are irrelevant.

What is going to replace this vanishing revenue? We need to hear from Ned.

On the labor side, what is Lamont going to do about fringe benefits? His first-term performance negotiating the wage side of the labor contract is not confidence-inspiring.

Ever since 2017 there had been a fear that modest reductions in retirement benefits taking effect on July 1, 2022 would cause mass retirements in the months immediately beforehand as employees sought to avoid the reductions.

Indeed, Lamont hired Boston Consulting Group to study the issue. BCG reported in March 2021 that over 8,000 state employees in the executive agencies alone (about 25,000 employees, plus or minus) would be retirement-eligible in fiscal 2022, and that 75% intended to retire.

Lamont was negligent and procrastinated a full year before striking a deal last March.

The deal he negotiated failed to prevent the retirement wave. Over 7,000 employees (of a total of 50,000 plus or minus) retired in fiscal 2022 and July of this year.

Ignoring the fairness or unfairness of the wage increases involved, the structure of the deal was harebrained. Lamont paid huge bonuses and a year’s worth of a retroactive pay raise in lump sums in June just before the reductions in retirement benefits were to take effect for future retirees. So, employees pocketed the financial rewards and, then, retired in droves before the deadline.

As a result, the state has had to re-hire over 800 retirees, apparently to plug serious holes in the staffing of various operating units.

Now, we need to hear from Ned about how he will bring state employee benefits in line with national norms, and, more importantly, in line with what the state can afford.

Insofar as energy is concerned, Lamont is simply unlucky to be in office as energy costs skyrocket.

Yet, at the least, Lamont can be a voice of reason and advocate on behalf of the state’s beleaguered citizens and businesses. He can tell Joe Biden to stop his attack on natural gas producers. Natural gas emits half the greenhouse gases as coal. Yet, by restricting natural gas exploration and production, Biden is forcing the nation to continue its reliance on dirty coal plants.

We need to hear Ned say that natural gas is part of the solution, not part of the problem. The state will not be able to attract / keep business with its stratospheric energy costs.

Apart from COVID, which afflicted all states and challenged all office holders, Governor Lamont enjoyed a charmed first term. Now, the state faces serious challenges. Citizens need to hear from Ned about his plans to meet them.