Lee Elci: All right, ladies and gentlemen, here we go. Thirty-six minutes after the hour. Let us welcome Red Jahncke. Red, good morning. How are you, sir?
Red Jahncke: Hey. I’m good, Lee. Yourself?
Lee Elci: You’re doing well. So let’s get right into this. You mentioned in your column that Dr. Andrew Biggs found that Connecticut state employees accrue future retirement health care benefits equal to 28% of their current wages each year. Now, tell us how this compares to private sector employees in Connecticut and whether this level of benefit is sustainable in the long term.
Red Jahncke: Well, first, let’s set some broad context. State employee compensation comes in four elements. One is wages. Two is health care benefits while they are on the job as active state employees. Three is pensions in retirement, and four is health care benefits in retirement.
This focuses on the last—what state employees are earning each year they work for the state in terms of future retiree health care benefits. That’s what Dr. Biggs’ research has shown. And that is worth about $26,000 in wage equivalents each year that they work for the state. That’s right.
Georgetown University conducted a study on the health care benefits state employees receive while on the job before retirement and found that state employees pay only 2% of their medical bills. So, both on the job and in retirement, Connecticut state employees have the highest health care benefits in all 50 states. They are tied with California, but those two states outpace state workers in all other 48 states.
Lee Elci: We’re talking with Red Jahncke. Also, can you elaborate a little bit on creative accounting in the OPEB report? Are there more specific examples of some of the things you referenced in your column?
Red Jahncke: Yeah, first of all, OPEB accounting is mind-numbing. So, I will give my best attempt at simplifying things. Future health care benefits in retirement are very long-term obligations. What actuaries do is take those estimated future benefits for employees and costs for the state and reduce them to a present value. That’s the value if all those benefits were paid today in full. This is done using an interest rate called the discount rate.
Now, the Government Accounting Standards Board has issued GASB 75, which states that two discount rates should be used. First, if funds have been set aside to pay these benefits, you can use an investment rate of return—in this state, that’s 6.9%—for the portion of benefits that can be paid from those funds. Once those funds run out, you must use the municipal bond borrowing rate, which is 3.65%.
The higher the discount rate, the lower the present value. GASB says to apply the higher rate to the earlier obligations. The impact of the discount rate is smaller on short-term obligations, but for long-term obligations, it matters a lot.
Connecticut, however, has decided to apply the higher investment rate to the most distant obligations and the lower rate to short-term obligations. This has the effect of dramatically reducing the estimated present value of those obligations. That is what Dr. Biggs called “creative accounting.”
Lee Elci: Right. Red Jahncke is with us, explaining and dissecting his latest piece. You can find it on the Connecticut Examiner, The-Red-Line.com, and some other places as well. Red is always writing, and we’re lucky enough to chat with him about this. What’s the simplest answer as to why Governor Lamont has rewarded state employees with six consecutive annual wage increases?
Red Jahncke: I think he doesn’t care. He sees it as a distant problem. If he even pays attention, he has this wonderful little mantra: “I have to pay our state employees these wages and benefits so I can hire the best and the brightest.” Well, does that mean that the other 49 states are hiring only dim bulbs and deadbeats?
The real point is that state employee compensation is by far the largest component of the budget. It’s over $10 billion a year. You can have an enormous impact by holding the line on state employee compensation. If you institute a two-year wage freeze, you free up the money that he claims he doesn’t have.
Lee Elci: Right. All right. Let me ask you two more. We’ve got time for two more. One is, you mention in your column that state employees should go back to work in an office setting instead of working from home. Can you elaborate?
Red Jahncke: Remote work was instituted during COVID as an emergency measure. Once we came out of COVID, there was an attempt to bring people back. But some state employees love that “pajama game,” so they contested being brought back to the office. A labor arbitrator ruled in favor of the state employees.
So let’s understand something here. The referees in these cases—the labor arbitrators—are biased in favor of the unions.
Lee Elci: All right, listen, you wrapped up your column with some interesting language. Can you explain what you meant by “financial jiu-jitsu”?
Red Jahncke: Well, in any industry, a company with the worst financial statements—high debt, declining sales, anemic economic growth—and yet paying the highest labor costs in the industry is defying logic. That’s the jiu-jitsu. It’s unsustainable. This state, when we hit the next stock market reversal or recession, is going to be in a world of hurt.
Lee Elci: Maybe happening now, right?
Red Jahncke: Yeah.
Lee Elci: Maybe happening now. The-Red-Line.com. Anything we left on the table?
Red Jahncke: Well, yeah. Next time, we can talk about what state employees are doing and what they are allowed to do. A recent study by the Townsend Group for Yankee Institute analyzed something called overtime spiking. There are still about 28,000 state employees who have the right to work large amounts of overtime in their last three to five years on the job. That overtime pay is factored into the base used to calculate their pension.
In this study, which was preliminary, we identified one employee whose numbers illustrate the issue. This employee had the right to include the last three years of overtime. In the year before retirement, he earned $299,000 in overtime. This was on a final salary of about $116,000. There are bills in the legislature introduced by Senator Rob Sampson to clamp down on overtime spiking. We not only need a wage freeze, but we need to put an end to this kind of system abuse. And I’m sure this case is not an outlier.
Lee Elci: I know a lot of people who do something similar—not to that extent, but close. That definitely seems like something that needs to be addressed. Red, I’ve got to run. I’ll talk to you next week, my friend. Thank you.
Red Jahncke: Good, sir.
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.