Connecticut Sinks Deeper into Debt, Hidden Behind Budget Surpluses

Red Jahncke (Photo courtesy of the author)

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The U.S. and the State of Connecticut are sinking deeper into debt. The skyrocketing national debt receives widespread media attention, Connecticut’s almost none. Uncle Sam’s growing debt is highlighted and explained by huge budget deficits, while Connecticut’s increasing liabilities are hidden behind budget surpluses.

Yet, there’s another reason that growing debt in the Nutmeg State is largely ignored. The increase is caused mainly by overgenerous and underfunded state employee compensation. No one, certainly not union-friendly Democrats, wants to offend public sector unions by exposing this reality.

Actually, Democrats have employed active disinformation and willful indifference to misinform and uninform the public about the last two state labor contracts.

In 2022, Governor Lamont inked the SEBAC 2022 agreement, a four-year deal with three years of 4.5% annual pay boosts (combining wages and “annual increments”). Lamont is now negotiating the fourth year, which was left “open.” The three-year increase accumulates to a robust 14% compound increase. That doesn’t count $3,500 in pensionable bonus payments nor the separate pandemic pay averaging $1,000 per employee in 2023.

When legislators approved SEBAC 2022, the Office of Fiscal Analysis estimated the future cost of the agreement, excluding the impact upon the state employee pension fund. OFA stated “The SERS impact will not be recognized until FY 24.” There has been no official follow-up analysis of SEBAC 2022, even to assess its impact upon SERS.

Contrast this with the treatment of the SEBAC 2017 labor agreement negotiated by former governor Dannel Malloy. Malloy claimed that SEBAC 2017 would save the state $24 billion over 20 years. He and Democrat legislators passed a law requiring the State Comptroller to track the alleged savings on an annual basis over a decade. Every year, the State Comptroller prepares the “SEBAC 2017 Savings Report,”

Almost half ($9.7 billion) of the “savings” were fictional wage concessions that state employees never made.

The fantasy relies upon the preposterous notion that state employees are entitled to raises every year, as if annual raises are the equivalent of a birthright. If employees do not get a raise, the raise they don’t get is called a “saving.”  

So, who established the “raise they didn’t get” in 2017? Malloy did. In his budget proposal, he proposed hundreds of millions of raises. Then, he negotiated a better bargain for a few years and called the difference “savings.”

How do we know this? From the documentation that Malloy’s Office of Policy and  Management published in support of his claimed savings. Under a header of “Wage Estimates were developed by OPM” (not an independent source), it states “Elimination of potential FY 2017, 2018, and 2019 increases: Removes all of the proposed RSA increase in the Governor’s recommended budget…”  [Emphasis added.]

The raises that workers “didn’t get” were figments of Dan Malloy’s imagination – they were “potential,” “proposed” and “recommended.” There was no existing wage contract under which unionized state workers were legally entitled to raises that they gave up in negotiations with Malloy.

Malloy claimed these wage savings in the fiscal 2018-2019 budget – and over the next 18 years. That is how the fantasy number balloons to $9.7 billion. Why not $48.5 billion over the next century?

Malloy’s claim was ludicrous in the first place, but this exercise in make-believe has become embarrassing even to the State Comptroller who wrote in the recent Report “In general, savings estimates of prior policy changes become more tenuous the more time passes…”

Wait, it gets worse. While employees agreed to three years of wage freezes, then they received two healthy 3.5% wage increases. In addition, most still received five years of “annual increments” (aka “step increases”) that average 2% per employee, and Malloy paid a $2,000 bonus to those who did not receive “increments” and $1,000 to those who did. Factoring in “increments” (but not bonuses), employees enjoyed three years of 2% annual increases and two of 5.5%. That accumulates to a compound 13.7% increase over the five-year period. Not bad.

The entire exercise involved sleight of hand where Malloy backloaded wage increases, so he could create the illusion of “savings” at the front end.

While SEBAC 2017 has been distorted by this elaborate exercise in disinformation, Lamont’s SEBAC 2022 deal has simply been ignored.

Except that the Nutmeg Research Institute chose not to ignore SEBAC 2022 and commissioned a study of it by The Townsend Group, which I head. We found that SEBAC 2022 increased the unfunded liability of the SERS pension fund by a whopping $4.5 billion, or 11%, and that it has increased state labor costs to a current annual running rate of $8.5 billion, a level $836 million, or 11%, higher than costs in fiscal 2021 immediately before SEBAC 2022 took effect.

It is time for Lamont to impose a back-loaded wage and increment freeze in the fourth “open” year of SEBAC 2022. Otherwise, the Nutmeg State will fall even deeper in debt.