Connecticut's state-employee safety net

Malloy recently plugged a $365-million deficit with legislation that came out of a December special session.

Having already negotiated a four-year no-layoff guarantee with state employees, Malloy has few options to fill the growing budget holes. (The projected deficit for the next two-year budget cycle is more than $2 billion.)

The state employees who cannot be laid off also have their compensation locked in, again by the contracts agreed to by Malloy.

This leaves Malloy cutting the safety net programs which he vowed not to "shred."

Medicaid, perhaps the fastest growing sector in Connecticut's economy, is even going to be cut a little bit to stem the tide. Of course, this makes perfect sense because state government in Connecticut exists to serve state employees first, at least according to the unions. Many state employees are motivated by altruism, but their unions represent, for the most part, only narcissism.

During the special session, state employee interests were at the top of the legislature's collective mind.

Outgoing Speaker of the House Chris Donovan organized state employees for SEIU while a legislator, a job he finally gave up when his colleagues elected him as speaker. Donovan's failed campaign for Congress, influenced by federal charges against members of his campaign staff for allegedly trading legislative favors for campaign contributions, left him without a seat in the statehouse.

Although the government unions lost one champion, another rose to fill the void. Rising House Majority Leader Joe Aresimowicz works for AFSCME Council 4, the largest union of state employees.

Need proof that state-employee interests were a top consideration during the special session? In an only-in-state-government plan to save money, the legislature took away so-called longevity bonuses for non-union state employees worth $6.2 million only to replace them with a raise of the same value.

Unfortunately for taxpayers, these bonuses were frozen, but now, as part of salaries, they will grow every time non-union employees get a percentage raise.

The special session, and for the most part even the next two legislative sessions, will have little impact on Connecticut's finances. They can't.

Malloy's job-security guarantee expires June 30, 2015, seven months after the 2014 election. Pay increases are set through June 30, 2016. Taxpayers are committed to provide pensions and healthcare benefits through June 30, 2022.

Whoever Connecticut's next governor is - whether Malloy wins, loses or takes a job in Washington - his or her single most important task will be to negotiate a new agreement with state employees.

If Connecticut wants to have a safety net left other than the silk-lined golden parachute provided for state employees, the next governor will need to make a critical point to state employees: I need flexibility to manage the government or a less-expensive workforce.

State employees currently have extensive benefits and work in a rigid, ossified - if not petrified - bureaucracy. These two conditions cannot continue to exist together.

Either state employees can continue to work in a faceless bureaucracy where little change is possible and no differentiation is made between employees of the same rank or they can continue to get benefits envied by the middle class and unimaginable to the people stuck in Connecticut's malfunctioning safety net.

The next governor should make this his or her opening proposition.

Option 1: Pensions vest today for every single state employee at their current salary and years of service levels. No more time can be earned toward pensions. Instead, employees receive 8 percent of their salary in the government equivalent of a 401(k) plan.

Employees who retire after 2022 get no retiree healthcare. Instead, the state will purchase long-term care insurance for its employees. This will provide a benefit for state employees with future offsets in state Medicaid spending.

In return, state employees can remain anonymous, undifferentiated cogs in the machine of state government.

Option 2: The administration can actually manage state government. All state employees will be evaluated annually and their performance will be graded. Two-thirds of the cost of step raises, cost-of-living increases and other pay bumps will all go into one pot. Management can distribute the increases however it wants, as long as only two-thirds of the total is distributed. (The state will recognize the remaining third as savings.) This will create an incentive among state employees to outperform their peers.

Up to 10 percent of state employees can be laid off, fired or replaced annually, no questions asked, no appeals, no arbitration, based on their performance evaluations and/or the state's needs.

This contrasts with the recent findings of state auditors that a number of managerial employees received performance bonuses despite the absence of a performance evaluation.

With this freedom to operate, the state can afford to maintain some of the anachronistic benefits afforded state employees with only a few modifications.

First, instead of cost-of-living increases, state employees should get a share of Connecticut's prosperity - or lack thereof, as the case may be - as suggested by Yale finance professor Robert Shiller.

If Connecticut's gross domestic product goes up, retired state employees should get an increase equal to half that amount. If output goes down, they should get a lack-of-prosperity reduction equal to half the percentage decrease in income.

Second, retired state employees should pay the same premiums for their healthcare as current employees do until they join Medicare, at which point they can make a nominal contribution. All contributions will be deducted from pension payments.

In return, state employees get to keep their defined-benefit pension and retiree healthcare programs.

If Connecticut doesn't take one of these paths soon - and behind strong leadership - nibbling around the edges won't ever be enough again.