Connecticut state employees are enjoying their sixth consecutive annual pay raise, pushing their wages up 33% under Ned Lamont and the Democrats. It is time for a wage freeze such as imposed by Lamont’s predecessor Democrat Dannel Malloy.
Why? Because these non-stop wage increases are unfair – nationally, private sector wages are up only 23% over this period and CPI inflation is up “only” 25% since Lamont took office. CT state employee wages are now the second highest in the nation.
Before Lamont and Democrats award their union allies a seventh consecutive annual wage increase, Republicans need to alert state voters and put an end to the gravy train.
State employee compensation is the largest cost of state government. Annualizing data for all paychecks issued on the latest pay date (September 20) as reflected on OpenCT, state employees will be paid $5.9 billion this fiscal year (2025). That’s just salaries and wages plus overtime. Benefits will add another $4.1 billion. That’s $10.0 billion, or about $2,775 for every man, woman and child in the Nutmeg State.
Not only are these raises unfair and unsustainable, but they are squeezing the state budget, causing Democrats to complain about constrained spending on social programs. They have also made a myth-maker of Ned Lamont. He has crowed about “making progress on pensions.” But pensions are pegged off wages. When wages rise, future pension obligations increase.
Indeed, over five years, there has been only about $1 billion in improvement in SERS unfunded liability. It has declined from $21.2 billion on June 30, 2018 to $20.1 billion at June 30, 2023. The improvement works out to about 5%, or 1% per year.
Yet, the SERS actuary is likely to report moderately better news in November for SERS’ sixth year (fiscal 2024) under Lamont, as the result of better results in investing SERS assets. But one year, a trend does not make. And the stock market won’t always cooperate.
Let’s take a preliminary look (final figures are not available) at the major factors impacting the SERS fund over fiscal 2024.
First, the state made its required annual contribution to the fund of about $2.0 billion. Employees themselves contributed about $200 million. A special deposit of $1.0 billion from the Volatility Cap in fiscal 2023 was placed in the SERS fund. That’s $3.2 billion in additions.
The largest deduction from SERS were the benefit payments to retirees. In fiscal 2023, the aggregate payment was $2.6 billion, up almost $100 million from the prior year. Let’s assume the same increase and project $2.7 billion in benefit payments in fiscal 2024.
That produces a net increase of about $500 million in the SERS fund, before the investment return on SERS assets. The State Treasurer’s Pension Fund Performance Reports shows an increase of $3.2 billion in the market value of assets from $20.1 billion on June 30, 2023 to $23.3 billion on June 30, 2024. Deducting the $500 million, implies an investment return of about $2.7 billion.
A $2.7 billion return on beginning assets of $20.1 billion implies an investment return of about 13.4%, close to, but somewhat higher than, the Treasurer’s reported return of 11.5% on SERS assets.
In addition, by convention, the actuary will add to the balance as of June 30, 2024, the special deposit from the fiscal 2024 Volatility Cap of $335 million that was made just this week. The actuary will also add another $180 million from last year’s budget surplus that the Treasurer says will be deposited into SERS later this year.
That’s a combined $515 million, which when added to assets of $23.3 billion as of last June 30th, yields about $23.8 billion in assets to fund all future pension benefits.
According to the actuary, future pension benefits were $42 billion on June 30, 2023.
The future benefit one year later as of June 30, 2024 is a function primarily of a few major factors: (1) state staffing and demographics, (a) in terms of the estimated future earnings of active employees and (b) the change in the population of retirees as active employees retire and existing retirees pass away; (2) the estimated increase in pension benefits triggered by ongoing contractual cost-of-living adjustments based on projected general inflation and (3) assumed future investment returns.
Rather than attempt to do actuarial work, let’s assume that these factors combined to produce a result similar to the prior five years, when the average annual increase in the future liability (“accrued liability”) has been about $1.5 billion. That implies a future liability of $43.5 versus assets of $23.8, leaving an unfunded liability of $19.7 billion, an improvement of about $400 million, or 2.0%, versus the unfunded liability of $20.1 billion at the end of fiscal 2023. That’s meager progress. Of course, the actuary may determine a higher or lower accrued liability.
Republicans should propose a wage freeze, with the “savings” dedicated to an additional contribution to SERS (from which state employees would benefit in terms of a more secure retirement), to tax relief and to targeted spending increases – in that order.
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.