Connecticut’s ‘exceptionalism’ is nothing to be proud of

Connecticut’s ‘exceptionalism’ is nothing to be proud of
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Republicans and Democrats are convening to nominate candidates for statewide offices in Connecticut’s most consequential election ever.

Democrats have had absolute control of the state for eight years, with disastrous consequences. The state has run budget deficits every year, taxes and bonded debt have increased markedly, and corporations have taken flight. Post-recession economic growth has been the weakest of the 50 states, with the economy actually shrinking over the past two years.

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Voters are certainly unhappy. Outgoing Democratic Gov. Dannel Malloy has the lowest approval of the nation’s governors, at 21 percent. However, voters may not have a full appreciation of the core problem — overly generous and underfunded state employee pay and benefits.

 

Over the past half-century, the social contract with respect to state employee compensation nationwide has been that employees accept lower wages in return for relatively generous pensions and health care benefits. There’s only one exception, Connecticut — and what an exception Connecticut is.

Connecticut state employees earn higher wages than the state’s comparable private-sector workers, while the national average state/private wage differential is 12 percent less, according to a state-by-state analysis of state employee compensation by Andrew Biggs and Jason Richwine of American Enterprise Institute.

With the disappearance of most private-sector benefits, the state/private differential on benefits has grown enormous, especially in Connecticut.

When wages and benefits are combined, Connecticut state employee total compensation leaps off the pages of the AEI study, clocking in at a 42 percent premium over total compensation for the state’s comparable private-sector workers. Only three other states paid more than a 25 percent premium — Pennsylvania (35 percent), New York (34 percent) and Illinois (26 percent). Eight states paid their state employees less total compensation than comparable private employees.

However, instead of focusing on Connecticut’s grossly overly generous compensation, most discussion focuses on its primary consequence, i.e. unfunded benefit obligations that have grown to massive amounts. These amounts, and how to finance them, draw all the attention.

Meanwhile, the fundamental cause continues unabated: namely, outsized current compensation, particularly wages, which are the largest piece of it. Outsized wages have a two-fold impact: they crowd out other spending, both the funding of legacy benefits and spending on needed state services, and they elevate the level for calculating future benefits.

So what have Malloy and the Democrats done about state employee wage levels over the years since the 2009 to 2012 period analyzed in the AEI study?

Malloy has negotiated, and Democrats have ratified, two super-sweetheart deals with state employee unions, the so-called SEBAC 2011 and SEBAC 2017 agreements, covering the 10 fiscal years 2012 through 2021. These two agreements encompass five years of wage freezes, three with 3 percent wage increases and two with 3.5 percent increases.

Sounds like only modest wage escalation, right? However, Malloy and the Democrats fail to mention something called “step increases,” which are regular annual wage increases for every full-time employee. According to the legislature’s nonpartisan Office of Fiscal Analysis (OFA), steps average 3 percent. Steps are suspended during the wage freezes, but they are in effect in the other five years, so the combined wage bumps in those years are actually hefty 6 percent and 6.5 percent increases.

Nevertheless, Malloy claims that he has achieved tens of billions of dollars in wage savings by imposing painful sacrifices.

According to the OFA, the average full-time state employee made $74,000 in July 2017, just before the 2017 SEBAC agreement took effect. Four years later, that employee will make over $84,000. Where are the savings? Where is the sacrifice?

There’s precious little sacrifice insofar as employee contributions to fund their own benefits. The latest SEBAC agreement raises their contribution to their pensions to paltry levels ranging from 2 percent to 4 percent of salary. It increases employees’ share of their health insurance premiums from 12 percent to 15 percent.

But, Malloy thinks he has extracted sacrifice, so he must have traded something for it, right? Union negotiators don’t give something for nothing. Malloy gave the unions no-layoff guarantees in both SEBAC agreements, eliminating the only other way to reduce labor costs:  workforce reductions.

With about the same number of employees (somewhat more than 50,000), and wages increasing, simple math tells us that there are no wage savings. Accordingly, the extraordinary overcompensation documented in the AEI study continues today, except that the resulting financial hole has grown much deeper since.

Indeed, despite the current one-time gusher of about $1.2 billion tax revenue derived predominantly from repatriated overseas income of state-based financial firms, the OFA projects average annual deficits of about $2.5 billion in the average annual $22 billion budgets in the “out years” of fiscal 2020 through 2022.  

In this context, it takes exceptional chutzpah for Malloy, the Democrats and the unions to claim billions of dollars in illusory savings and sacrifice. That’s what exceptionalism means in deep blue, union-dominated Connecticut.

A smart Democratic candidate would condemn the rapacious public-sector unions in a “Sister Souljah moment” to defuse the citizenry’s palpable anti-union anger. A smart Republican would speak plainly about the elephant in the room and present plans to break the union stranglehold and end Connecticut’s perverted version of exceptionalism.

Red Jahncke is president of Townsend Group International, a business consultancy headquartered in Connecticut. Follow him on Twitter @RedJahncke.