The arguments in favor of a wage freeze

October 2, 2024 6:00 a.m. • Last updated: October 1, 2024 2:51 p.m.

Connecticut state workers are enjoying their sixth consecutive annual pay raise, boosting their salaries by 33% under Gov. Ned Lamont and Democrats. It’s time for a wage freeze, like the one imposed by Democrat Dannel Malloy, Lamont’s predecessor.

For what? Because these relentless wage increases are unfair – nationally, private sector wages have only increased by 23% and Consumer Price Index inflation has “only” increased by 25% since Lamont came to power. Salaries for Connecticut state employees are now the second highest in all 50 states.

Before Lamont and Democrats give their union allies a seventh straight annual pay raise, Republicans need to alert the state’s voters and put an end to the gravy train.

Paying state employees is the largest cost of state government. By annualizing data from all paychecks issued as of the last pay date (September 20, 2024), as reported on OpenCT, state employees will receive $5.9 billion this fiscal year (2025). This is just wages and salaries plus overtime. The benefits will add another $4.1 billion. That’s $10 billion, or about $2,775 for every man, woman and child in the Nutmeg State.

These increases are unfair and unsustainable. They are squeezing the state budget, leading Democrats to complain about limited spending on social programs. They also made Ned Lamont a myth maker. He boasted of “making progress on pensions”. But pensions are indexed to salaries. When wages increase, future pension obligations increase.

Indeed, over five years, there has only been about a $1 billion improvement in SERS’ unfunded liability. It increased from $21.2 billion as of June 30, 2018 to $20.1 billion as of June 30, 2023. The improvement amounts to approximately 5%, or 1% per year.

Still, the SERS actuary is expected to report slightly better news in November for SERS’s sixth year (fiscal year 2024) under Lamont, due to better results in the investment of SERS assets. But one year does not make a trend. And the stock market won’t always cooperate.

Let’s take a first look (final numbers are not available) at the key factors impacting the SERS fund in FY2024.

First, the state made its required annual contribution to the fund, approximately $2 billion. The employees themselves contributed approximately $200 million. A special deposit of $1.0 billion from the volatility cap in fiscal year 2023 was placed in the SERS fund in 2024. This represents $3.2 billion in additions.

The largest deduction from SERS was for the payment of benefits to retirees. In fiscal year 2023, the total payment was $2.6 billion, an increase of nearly $100 million from the previous year. Assume the same increase and project $2.7 billion in benefits paid in fiscal year 2024.

This produces a net increase of approximately $500 million in the SERS fund, before the investment return on the SERS assets. State Treasurer’s Pension Fund Performance Reports Show $3.2 Billion Increase in Market Value of Assets, From $20.1 Billion as of June 30, 2023, to $23.3 Billion of dollars as of June 30, 2024. Deducting the $500 million, this implies a return on investment of approximately $2.7 billion.

A return on investment of $2.7 billion on initial assets of $20.1 billion implies a return on investment of approximately 13.4%, close to, but slightly higher than, the treasurer’s reported return of 11. 5% on SERS assets.

Additionally, by convention, the actuary will add to the June 30, 2024 balance the special volatility cap deposit for fiscal year 2024 of $335 million that was made last week. The actuary will also add a further $180 million to last year’s budget surplus which the treasurer says will be deposited into SERS later this year.

This represents a total of $515 million, which when added to assets of $23.3 billion as of June 30, generates approximately $23.8 billion in assets to fund all future retirement benefits.

According to the actuary, future pension benefits amounted to $42 billion as of June 30, 2023.

The actuary will determine future benefits one year later, i.e. on June 30, 2024, but let us make the simplifying assumption that the actuary’s assessment will be similar to that of the previous five years, when the average annual increase in future liabilities (“accrued liability”) amounts to approximately $1.5 billion.

This implies a future liability of $43.5 compared to an asset of $23.8, leaving an unfunded liability of $19.7 billion, an improvement of approximately $400 million, or 2, 0%, compared to the unfunded liability of $20.1 billion at the end of fiscal 2023. This is meager progress. Of course, the actuary can determine a higher or lower accumulated liability.

Republicans are expected to propose a wage freeze, with the “savings” going towards an additional SERS contribution (which civil servants benefit from in terms of more secure retirement), tax relief and targeted spending increases – in this order.

Red Jahncke is the founder and CEO of The Townsend Group International, LLC, based in Connecticut. He is a nationally known columnist who writes about politics and politics.