Gov. Dannel P. Malloy laid out sweeping changes he wants to make to the state employee pension system and business taxation during an hour-long presentation to his cabinet Wednesday.
It was Malloy’s way of conveying information about the budget to legislative leaders, with whom he’s negotiating mid-year budget cuts behind closed doors.
“Together, as Democrats and Republicans, we can use this moment to not only address our short-term situation, but also to have an important conversation about the sustainability of our budget over the long-term,” Malloy said during the cabinet meeting. “By setting clear priorities and making smart investments, Connecticut can create a sustainable budget and a sustainable economy.”
Malloy didn’t offer specifics on what he would like to see cut from the state budget, but he outlined his plan to downsize the state workforce by at least 500 employees next year. Part of that plan also includes deferring scheduled wage increases for 1,600 non-union managers until January to save about $1 million.
Office of Policy and Management Secretary Ben Barnes said the changes to the business tax package will cost the state under $10 million, but will go a long way toward improving business confidence in the state.
Malloy is proposing changing the unitary tax structure so it’s only calculated using the sales the company has in Connecticut. Malloy is also proposing a 15-day exemption on personal income taxes from employees who may come to Connecticut to train at a company’s corporate headquarters here.
Malloy also is proposing to restore the 70-percent limit on Research and Development tax credits by 2017 and changing how net operating loss carry-forwards are taxed. Malloy still wants to maintain the 50-percent threshold for how losses a company can carry forward into the next tax year, but will exempt companies that continue to pay a minimum tax of $2.5 million.
“Let there be no doubt that we will take the steps necessary to put the state’s finances in order,” Malloy said.
Malloy said the tax changes make for a “fair and more reliable system” for everybody.
Bonnie Stewart, vice president of government and public affairs at the Connecticut Business and Industry Association, attended the governor’s presentation Wednesday and said afterward that she appreciated his efforts.
Stewart said the change to the Research and Development tax credit is a big issue, and so is the net loss carry-forward.
“From the start we’ve been saying something dramatic is needed to turn the state around,” Stewart said. “But we don’t have any quick answers. Nobody seems to have a silver bullet.”
She said the CBIA will work with those trying to bring about change and make it happen as soon as possible.
The pension changes Malloy proposed Wednesday won’t be as immediate as some of the tax changes.
Malloy wants to reduce the investment return assumptions for both the State Employees Retirement System and the Teachers’ Retirement System from 8 percent to 5.5 percent.
He’s also looking at bifurcating the State Employees Retirement System with a closed plan for Tier 1 employees and an open plan for Tier 2 and Tier 3 employees. The Tier 2 and Tier 3 system is about 95 percent funded. The unfunded pension liability — or at least $15 billion of the $25 billion liability — can be attributed to those Tier 1 employees, many of whom have retired.
“Tier 1 is the part of the pension fund that’s driving the funding ratio,” Barnes said.
Malloy said he doesn’t believe policymakers can have a reasonable discussion about the unfunded pension liability until “we bifurcate or understand what we’re talking about.”
He said he doesn’t believe people understand what “pay as you go” means. He said it means the money that has been coming into the pension fund has been immediately going out the door to the retirees hired before 1984. There’s no savings so there’s no opportunity to for any investment earnings. There are only about 2,200 Tier 1 employees still working for the state.
State Comptroller Kevin Lembo said Malloy’s proposed changes are significant and “require greater detail, deeper analysis, and raise several questions that we must consider.”
Lembo pointed out that by bifurcating the State Employees Retirement System, the liabilities are not eliminated, but shifted.
“How does this liability shift affect the General Fund and state spending cap? How does it compromise federal revenue that the State Employees Retirement System receives related to fringe benefit recovery? These are only preliminary questions that we must fully explore,” Lembo said.
In order to make any of the changes to the pensions, Malloy will need the support for the State Employees Bargaining Agent Coalition.
Malloy’s administration is about to start negotiations with all the state bargaining units except the state police. However, the contract for pension and health benefits isn’t scheduled to be opened — but can be if both sides agree — until 2022.
Malloy’s administration has been vague about what it will ask of the state employees in those negotiations, which are supposed to be focused on salary. But Malloy said today that he wants to “increase efficiency” through those contracts and “find ways to become more productive while controlling costs.”
He said the goal of those negotiations is “to save money.”
Daniel Livingston, the chief negotiator for SEBAC, didn’t comment on the goal of negotiations, but said in a statement that they have long pointed out Connecticut’s “well-funded and modest pension system for current employees, and that the real issue is a long standing debt largely caused by politicians who were in office long before we began collectively bargaining benefits in 1981.”
He also made it clear no changes to the pensions would be made without their input.
“By law, no change in funding provisions can occur unless both sides agree that it is fair to public service workers and the public we serve,” Livingston said. “We welcome the opportunity to work with the governor, other constitutional officers and the General Assembly on the most responsible way to pay down that old debt and sustain a system that benefits Connecticut’s economy.”