Gov. Dannel Malloy’s budget will get torn to pieces over the next two months by lawmakers and special interests. Let’s take a time out to acknowledge one subtle but important improvement in Malloy’s proposal.

Currently, each state agency budget has responsibility for its payroll, but not the fringe benefits for its employees. Instead healthcare and pension contributions fall under their own department, comptroller non-functional. By separating responsibility for pay and benefits, we get unintended and less-than-ideal results.

Malloy’s plan puts fringe benefits into agency budgets. This makes sense because it brings accountability to these costs. Right now it is as if each department had to buy cars and a separate department of maintenance had to pay for gas and upkeep. It would be no surprise if the car buyers paid more attention to the price today rather than the total cost of gas mileage and maintenance.

For as long as I’m aware, the Connecticut state budget has used this bizarre and problematic approach. How can you responsibly budget if some of the money you spend isn’t attributed to you?

Perhaps Malloy’s budget goes a bit too far suggesting lawmakers give agencies block grants instead of line-by-line budgets. However lawmakers should accept his suggestion for realigning the personnel incentives. If an agency wants to hire, it should take responsibility for all the hiring-related costs. If it wants to layoff employees, it should recognize those savings, too. Otherwise we will keep growing the already-bloated “non-functional” segment of our budget.

The cost of state employee fringe benefits exceeds $2 billion or 10 percent of the budget, so this is a significant issue. To put it another way, for each dollar we spend on salary we spend more than 50 cents on benefits. These costs create some unintended consequences of their own.

High benefit costs increase overtime in two ways. First, and perhaps more well-known, the pension formula encourages employees to “spike” their pensions by working extra overtime to generate a few years of exceptionally high pay. One of the Malloy reforms from 2011 changed the pension formula from the three highest years to the five highest-pay years, limiting the impact of spiking. In any case, spiking probably does more to concentrate overtime with a smaller number of employees than it does to increase overtime.

More significantly, high per employee costs create an incentive toward overtime rather than new hiring. On average healthcare for a state employee costs more than $10,000, regardless of pay. A state employee with a family could cost twice as much, again irrespective of pay. And since each employee is likely to one day get a pension, sometimes it makes more sense pay one slightly higher pension rather than add a second one altogether.

Another unintended consequence of high benefit costs is the need to layoff employees. The Malloy administration has suggested 1,000 or even thousands of employees could get pink slips. This is largely necessary because of the high cost and inflexibility of benefits. These benefit costs are growing at double digit rates while tax revenue is growing in the low single digits.

It might make sense to group certain costs in the non-functional budget. It is helpful to see total expenditures in these areas across state government. However a case could be made for shrinking this budget even beyond removing

And really none of this spending is actually “non-functional.” Of course it has a function, the same function as the employee who is receiving those benefits. Keeping them separate is an illusion we can’t afford.

This article first appeared in the Lakeville Journal.

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