OFFICE OF FISCAL ANALYSIS

Legislative Office Building, Room 5200

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EMERGENCY CERTIFICATION

HR-202

RESOLUTION PROPOSING APPROVAL OF AN AGREEMENT BETWEEN THE STATE OF CONNECTICUT AND THE STATE EMPLOYEES BARGAINING AGENT COALITION (SEBAC).

OFA Fiscal Note

State Impact: See Below

Municipal Impact: None

Explanation

The resolution approves the provisions of (1) an agreement between the State of Connecticut and the State Employees Bargaining Agent Coalition (SEBAC) and (2) collective bargaining agreements between the State and individual bargaining units.¹ The various provisions of the agreement between the State and SEBAC are assumed to extend to non-union employees in accordance with past practice. The agreements govern the period FY 17 to FY 21 for state employee wages and payments and extends the provisions of prior SEBAC agreements, most recently amended in 2011, governing health and pension benefits an additional five years until FY 27.²

The SEBAC agreement and the collective bargaining agreements are estimated to save $371.8 million in FY 18, $328.6 million in FY 19, $328.9 million in FY 20, and $153.6 million in FY 21. The savings assume the majority of the provisions governing active health and retiree health effective in FY 18 are operationalized as of September 1, 2017 for 10 months of savings.³

Table 1.1 below provides a detailed breakout of the fiscal impact by major provision for the period FY 17 to FY 21.

Table 1.1 - Estimated Impact of SEBAC Agreement

All Funds - In Millions of Dollars

Wages and Payments

State employees will not receive a General Wage Increase (GWI) or Annual Increment (AI) in each of FY 17, FY 18 and FY 19. There is no fiscal impact attributed to a wage freeze as there are no collective bargaining contracts in place.⁴

Employees will receive a 3.5% GWI, plus AI, in each of FY 20 and FY 21. This is estimated to cost $156.2 million in FY 20 and $351.8 million in FY 21. The FY 21 cost reflects the annualization of the FY 20 wage costs plus the FY 21 wage costs.

In FY 19, employees will receive a $2,000 one-time payment (or top step lump sum bonus plus $1,000). It is estimated that 50,254 employees will receive the $2,000 payment, totaling $100.5 million. It is estimated that 4,263 employees will receive the top step lump sum bonus plus $1,000 payment, totaling $4.4 million.

In FY 18, three furlough days is estimated to save $31.2 million.

The April 2018 longevity payment⁵ will be delayed until July 2018. This will shift costs of $10.7 million from FY 18 to FY 19.

Other wage payments (e.g. tuition reimbursement, professional development, shift differential) will result in costs of approximately $2 million in FY 18 through FY 21.

Active Employee Health Care

The agreement makes several changes to active state employee health care for current and future⁶ state employees. The changes result in net savings ranging from approximately $56.6 million in FY 18 to $87.2 million in FY 21. Net annual savings for the period FY 22 to FY 27 are $94.6 million to $108 million respectively, increasing 3% per year therein.

Changes include the following:

In general, the active employee health care changes result in savings due to (1) an increase in employee contributions for services (e.g. increased premiums and copays), and (2) shift to lower cost and higher quality providers. It is reasonable to assume higher quality providers could result in slower growth in medical expenditures in the long term, however, savings related to better health outcomes were not factored into the short term or long term savings projections as they are contingent on the mix of services utilized in the future. Pharmacy savings, in addition to increased employee contributions, are driven by (1) an increase in generic utilization, (2) an increase in pharmacy rebates, and (3) more favorable pricing due to negotiated changes in retiree health coverage.

Retiree Health Care

The agreement makes several changes to retired employee health care for current and future retired state employees.⁷ The changes result in savings of approximately $65 million in FY 18 to $150.2 million in FY 21. Annual savings for the period FY 22 to FY 27 are $157.3 million to $199.2 million respectively, increasing 4 - 5% per year therein.

Changes include the following:

The majority of the savings, over 90%, related to retiree health care changes are the result of converting from a self-insured policy for Medicare retirees whereby Medicare is the primary insurer for the retiree and the state health plan wraps around to provide coverage for services not covered by Medicare but included in the state plan. The savings is the difference between projected self-insured rates compared to the premiums provided by the insurance carrier for the Medicare Advantage Plan.

Conversion to a Medicare Advantage Plan does not change the nature of the state's current pay-as-you go system for retiree health care. The combined impact to the state's Other Post-Employment Benefits (OPEB) accrued liability from the Medicare Advantage change as well as increasing new employee contributions for 15 years will be reflected in the next OPEB actuarial valuation. The conversion to a Medicare Advantage Plan reduced the liability by $5.3 billion to $15.6 billion; compared to $20.9 billion.

Lastly, while no savings are anticipated in the near term, savings may accrue to the state in the long term if the social security disability requirement for disability retirees in the State Employees' Retirement System results in more retirees enrolling in Medicare where the state covers approximately 20% of the cost of care. Potential savings will depend on the social security determination for disability retirees who otherwise would not have qualified for Medicare.

Retirement Changes

The agreement makes several changes to the State Employees' Retirement System (SERS) and the Higher Education Alternate Retirement Program (ARP). The changes result in net savings of approximately $210.3 million in FY 18 to $270 million in FY 21. Net annual savings for the period FY 22 to FY 27 are $290 million to $335.4 million respectively, increasing 2-6% per year therein.

Changes include the following:

ARP is a defined contribution plan for employees of the state's higher education institutions. Savings are the direct result of a reduction in the employer contribution, currently 8% of covered payroll. Currently, total employer contribution from all funds is approximately $68 million per year.

SERS is a defined benefit plan for state employees, which is funded on an actuarial reserve basis whereby the state is required to pay the actuarially determined employer contribution (ADEC) each year. The aforementioned provisions of the agreement pertaining to SERS as well as the impact of a wage freeze (which decreases projected future earnings and therefore retirement benefits) result in net savings of $205.3 million in FY 18 and $233.5 million in FY 19. The resulting ADEC is $1.4 billion in FY 18 and $1.6 billion in FY 19, including the employer's contribution towards the defined contribution portion of new employees' benefit. The unfunded liability is reduced by $1.3 billion (from $21.7 billion to $20.4 billion). Total state contributions to SERS over the period FY 18 to FY 27 reach a maximum of $2.2 billion compared to $2.6 billion. The funded ratio of the plan increases slightly from 35.5% to 36.9%.

Revenue Impact

The resolution affirms a negotiated agreement with labor that will: (1) increase pre-tax deductions for employees' contributions to pension and health benefit programs, (2) enact a wage freeze in the near-term but increase wages in the out years, and (3) preclude layoffs for unionized employees for 4 years.

Increasing pre-tax deductions (pension and health) from employees will reduce the Income Tax base and thus the withholding tax portion of the Income Tax.  The revenue loss is estimated to be up to $3.1 million each year of the 2018 -2019 Biennium.  The negotiated schedule of wage increases will increase Income Tax collections estimated as follows: (1) $6 million in FY 19, (2) $8.1 million in FY 20, and (3) $18 million in FY 21.  Changes in turnover rates may affect these estimates.

The Out Years

The fiscal impact for the out years (FY 22 to FY 27) is described above.

The preceding Fiscal Impact statement is prepared for the benefit of the members of the General Assembly, solely for the purposes of information, summarization and explanation and does not represent the intent of the General Assembly or either chamber thereof for any purpose. In general, fiscal impacts are based upon a variety of informational sources, including the analyst's professional knowledge. Whenever applicable, agency data is consulted as part of the analysis, however final products do not necessarily reflect an assessment from any specific department.

¹ The State Police (NP-1) bargaining unit and the Assistant Attorney Generals' bargaining unit are included in the health and pension provisions of the SEBAC agreement, but are not part of wage provisions. These two bargaining units will separately negotiate wage agreements with the state.

² The SEBAC 2011 agreement governing pension and health benefits was set to expire effective June 30, 2022.

³ The Medicare Advantage program for the over 65 retiree population is effective as of January 1, 2018.

⁴ The State Police (NP-1) bargaining unit contract expires June 30, 2018. However, they are not included in the wage and payment provisions of this agreement.

⁵ Non-union employees do not receive longevity payments.

⁶ Future state employees are defined as those hired on or after July 1, 2017.

⁷ New retirees are defined as those who retire after October 2, 2017 or the 2nd of the month 60 days after legislative approval of the agreement, whichever is later.