Federation of Connecticut Taxpayer Organizations

HARTFORD � As state lawmakers meet today in special session to address surging gasoline prices, they are tackling one of the most pressing election-year issue.

But when it comes to finances, the 800-pound gorilla that remains largely unnoticed in the room is the nearly $6 billion in next year�s budget dedicated to state employee salaries and fringe benefits.

Nearly one-third of that $18.41 billion plan will be spent on state workers, retirees, and their families � and on the statewide teachers pension plan � providing benefits many legislators argue far exceed those offered in the private sector.

At first glance, devoting one-third of the budget to salaries and benefits might not seem overly burdensome.

But once a few big-ticket items not tied to state jobs are removed � such as $3.7 billion for Medicaid benefits, $2.7 billion for town grants, and $1.8 billion for debt service � employee compensation represents more than half of the remaining budget picture.

Are those benefits too high, and are they driving state taxes upward? Or is the problem that the wealth gap � with the rich on one side and the middle income and poor on the other � is growing too fast? In other words, have state pay and benefits risen too quickly, or is the private sector losing ground too fast?

�Public service employment used to represent not necessarily the best pay, but you had a level of security and pension and health benefits you wouldn�t necessarily get in the private sector,� said Rep. Kevin M. DelGobbo of Naugatuck, the ranking House Republican on the Appropriations Committee. �Now you get the compensation, plus job security, plus retirement and medical benefits that are way beyond anything in the norm in the private sector.

�The scale has tipped so much, you have to ask: �Is it sustainable?��

Long contract, first-rate benefits

According to Comptroller Nancy Wyman�s office, the average health insurance cost for a state worker is $6,086 per year, and the state pays $5,700 of that. For a family, the average is $17,200 with government paying $14,900.

A 2007 survey of Northeast states prepared by the Kaiser Family Foundation and Health Research & Education Trust put the average cost for individuals and families in the private sector at $4,590 and $12,884, respectively.

The state�s health benefits are locked in until 2017 under to a 20-year contract struck in 1997 with the State Employees Bargaining Agent Coalition.

Individual, short-term contracts with the more than 30 bargaining units also allow for an array of raises: general wage increases to reflect inflation; annual increments to reward improved ability and merit; and longevity pay for employees after they reach benchmarks such as 10 or 15 years of service. And this is in addition to pay hikes tied to promotions.

Though state officials and fiscal analysts warn repeatedly of the state economy heading into recession next year, all but one bargaining unit with approved contracts are slated to receive general wage hikes of at least 3 percent in 2009. Some higher education employees are slated to receive 4.3, 4.8, or even 5.5 percent.

Couple that with annual increments that usually start at 1.5 percent and longevity pay for experienced employees, and most raises will far outstrip the private sector.

Even in 2002-03, when layoffs and an early retirement program removed 4,560 state employees, most workers received a general wage hike of at least 3 percent and an annual increment raise or longevity raise.

Worries about the future

The sustainability question has been raised over the past two years by Gov. M. Jodi Rell�s administration. It particularly has expressed concern about the long-term impacts of pension and health benefits.

�Anybody in my position has to have that concern,� said Office of Policy and Management Secretary Robert L. Genuario, Rell�s budget director. �My position demands that somebody draws attention to these long-term issues. There are limits to what we can do.�

A December study by the Pew Center on States, a nationally recognized nonprofit public policy group, placed Connecticut among the worst-prepared states in terms of saving money to cover retirement benefits for public employees.

While states have, on average, socked away 85 percent of their pension obligations � and more than 70 percent when pension and health insurance obligations are considered � Connecticut had reserved just $19 million through 2006 toward a combined obligation of $56 million.

According to the report, it would cost each resident in Connecticut $5,000 to cover retiree health insurance costs alone.

Connecticut has made efforts recently to reverse that trend, including a $2 billion borrowing initiative to bolster its statewide teachers retirement program, and higher annual contributions to its pension funds over the past three years.

�This is a problem that has literally been handled irresponsibly for three decades under all sorts of administrations and legislatures until � the current administration brought it into focus,� Genuario said.

But others argue that the biggest limitation facing the state is its unwillingness to address the growing gap between Connecticut�s wealthy and its poor and middle-income residents.

�What�s wrong with good health care?�

�What�s driving most of the increases in benefits are big increases in the cost of health care � and that�s true of every business in the private sector as well,� said Rep. Denise W. Merrill, D-Mansfield, co-chairwoman of the Appropriations Committee. �We all have to get a handle on that.�

But Merrill quickly added that the problem isn�t state government. �The problem is that the private sector is taking benefits away,� she said. �What�s wrong with people having good health care?

�The bottom line is we have a Republican governor who doesn�t want tax reform,� she continued.

Merrill was referring to majority Democrats� efforts last year to overhaul the state income tax. Their plan would have created five rates for varying income levels � topped by a new rate of 6.5 percent on families earning more than $500,000 per year. It also would have expanded income tax credits for middle-income and poor families.

Department of Revenue Services statistics show that between the 1997 and 2004 tax years, the number of households earning more than $1 million rose by almost 57 percent. Those topping $2 million were up 59 percent.

The state�s income tax, enacted in 1991, is relatively flat, though there is a basic exemption, and a property tax credit for low- and middle-income households.

Individuals earning $12,000 or less, and couples earning $24,000 or less, owe no taxes.

The first $10,000 earned by an individual who makes at least $12,001 and the first $20,000 by a couple earning at least $24,001 are taxed at 3 percent. All income after that is taxed at close to 5 percent, regardless of whether a household earns $50,000 or $50 million.

Merrill added that many forget the state did impose a tax on capital gains and dividends � which was eliminated when the income tax was enacted. That capital gains levy, aimed largely at Connecticut�s wealthiest households, ran as high as 14 percent in 1990.

�The rich got a huge state tax break when the income tax was adopted and everything was shifted onto the middle class,� she said. �We�ve been trying to restore some of the balance ever since.�

Union: State workers hit too

Michael Winkler of Vernon, who has spent the past two decades in state employee union leadership, said many forget retirement benefits twice were scaled back. And as a result of the controversial 1997 benefits deal, many retirees now pay at least a portion of their medical benefits.

�We�ve done nothing but cut benefits over time,� said Winkler, a past president and currently vice president of the Administrative and Residual Employees Union.

Winkler added, �Obviously there�s a 20-year deal in place and the unions would be insane to renegotiate. But there�s also obviously enough wealth in this state that we should have medical care for all of our citizens.�

A 2005 legislative research report showing more than 7,200 adults employed at 25 major companies receive state-funded health insurance for their children, themselves, or both through the Husky program, which costs taxpayers over $700 million annually.

Topping that list was Wal-Mart and several other big-name department and grocery stores and fast-food franchises, such Stop & Shop, Dunkin� Donuts, McDonald�s, Shaws, Burger King, Friendly�s, Home Depot, Subway, Target, Walgreens, and Sears.

�Everybody has to be brought up,� Winkler said. �The faster we do that, the faster state employees will no longer be separated from others.�