The clock is ticking on sensible state budget reform

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I read with great interest Keith Phaneuf’s recent series on Connecticut’s serious budget challenges. He is clearly the best journalist on this subject in our state. Last month I watched Gov.  Dannel Malloy’s budget speech from the floor of the State House. The governor’s budget has already resulted in significant discussion and debate. Three of his key and controversial proposals deserve comment.

First, the governor now seems to recognize that the state’s budget deficit cannot be closed and the fiscal sustainability of the state’s finances cannot be achieved without restructuring the state’s workforce and compensation programs. As a result, he has included a $700 million target in year one and a $1.5 billion target over two years for labor related cost savings in his budget.

Based on independent studies, Connecticut state workers have the highest total compensation premium as compared to the private sector of any state in the union. This is directly attributable to unreasonable, unaffordable, unsustainable and unfunded pension and retiree health care benefits.

The past long-term term labor agreements entered into by Govs. Rowland and Malloy were irresponsible and are unsustainable. The recently enacted pension funding legislation served to reduce near term contributions while increasing total contributions over the next 30 years by over $11 billion. All of this without achieving any real benefit plan reforms or labor concessions!

Time will tell whether Gov. Malloy can achieve the significant labor cost savings included in his budget proposal. Based on reforms achieved by other states, Connecticut’s retiree health care program alone is dramatically more generous than other states and Fortune 500 companies. Shockingly, Connecticut even pays for retiree health care for individuals who are working and are eligible for health care from other employers!

In addition, there are several current abuses in the state’s pension system that need to be addressed. Examples include individual pension payments in excess of annual federal qualified plan limits, considering income amounts in excess of annual base pay in determining pension benefits, and failure to cap post-employment pension indexing based on a formula that considers years of service and the amount of current base pay associated with the position the state worker retired from.

Based on my consulting experience and efforts by other states, the above type changes can reduce the state’s unfunded retirement obligations by at least $15-$20 billion dollars! Such a restructuring should be accompanied by firm contribution requirements and a modernization and enhancement of the state’s current cash compensation practices. The same approach also makes sense for many municipalities.

Second, the governor is proposing a dramatic restructuring of the state’s education funding and municipal aid. While reasonable people can and will differ on his proposals, from an intellectual perspective, state education funding should be based primarily on the number of special needs students and the number of students eligible for free or reduced-price lunches. In any event, the recent state court decision mandates that changes be made to the state’s current approach to education funding.

Finally, Gov. Malloy’s budget properly recognizes that several Connecticut cities are distressed and headed for bankruptcy absent a change in course. He has proposed creation of a Municipal Accountability Review Board (MARB) for cities that meet certain criteria.

Clearly, any city or town that has a mill rate over 40 has lost control of its finances. They should automatically be subject to oversight and potential restructuring if they are receiving state aid. In addition, the most seriously distressed cities and towns should be required to put all the current contractual agreements “on the table” for reconsideration.

Most of these towns will need to restructure their retirement plans in an equitable and sustainable manner in order to become competitive and avoid bankruptcy. If they don’t, a non-elected federal bankruptcy judge will make all the required tough decisions as has been done in Detroit and elsewhere.

Connecticut has waited far too long to address the above issues. It’s not a matter of if related changes will be made, it’s really a matter of when, how and by whom. The clock is ticking and time is not working in our favor.

David Walker is the former U.S. Comptroller General.

What do you think?

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