Connecticut Gov. Dannel Malloy released a framework for an agreement with the leadership of the state employee unions that he said would reopen the contract now in effect through June 30, 2022.

The move, which aims to save $20 billion over 20 years, comes as the state faces a roughly $5 billion deficit for the next biennial budget and amid six bond-rating downgrades over the past 12 months.

Connecticut Governor Dannel Malloy
"Our current economic reality requires that we revisit and redefine the state’s relationship with employees," said Connecticut Gov. Dannel Malloy. Bloomberg News

Malloy said late Tuesday that the tentative deal with the State Employee Bargaining Agent Coalition umbrella group reflects an effort to create a significant, long-term structural overhaul to pension and benefit costs that will help generate large annual savings for many years.

The governor expects the initiative to save about $710 million in fiscal 2018 and $850 million in FY 2019, with the savings continuing to rise annually.

Among many other changes, said Malloy, the framework includes wage and increment freezes in three fiscal years that will permanently reduce the cost of projected pensions by more than 10%.

It also Increases employee pension contributions by 2% of pay; redesigns the health insurance plan; increases the employee share of health-care premiums by 3%; increases the cost of co-pays on prescription drugs; and implements a standard drug formulary.

In addition, it would create a Tier IV “hybrid” pension-retirement plan that combines a traditional defined benefit plan with a 401(k)-style defined contribution plan.

Malloy also called for job-security protections through June 30, 2020.

"Our current economic reality requires that we revisit and redefine the state’s relationship with employees," said Malloy.

Over the past several months, Malloy and top lawmakers have been negotiating labor concessions. Last week he called progress in those talks essential to balancing the budget.

Malloy, a Democrat, must contend with a 19-19 split in the Senate. The Democrats hold only a narrow advantage in the House of Representatives, 79-72.

House Republican Leader Themis Klarides, R-Derby, said the proposed agreement does not rein in state spending enough and added that the House and Senate should go on record as either in support or against the plan through a vote in each chamber.

“Committing taxpayers, future governors and the next five legislatures to paying for fringe benefits that are unseen anywhere else but in state government – and a pension system that is collapsing around us as we speak – is unfathomable, ’’ said Klarides. “After months of negotiations, this proposed deal falls short of where we need to be.’’

She said the deal is based on extending the expiration date of 2022 on the current pension and healthcare programs for five more years.

Earlier this month, Connecticut joined Illinois and New Jersey as the only states with ratings below double-A.

Fitch Ratings and S&P Global Ratings dropped Connecticut’s general obligation bonds to A-plus from AA-minus, while Moody's Investors Service lowered the GOs to A1 from Aa3.

Kroll Bond Rating Agency assigns its AA-minus rating and stable outlook.

Malloy on May 15 presented an updated $39.4 billion biennial budget in the face of widening projected deficits. It cuts general fund expenditures by an additional $241 million and other funds by $363 million in fiscal 2018, and virtually wipes out the $236 million rainy day account.

Plummeting income tax receipts accounted for the revenue drop.

Fixed costs are another major problem for Connecticut. According to Janney Capital Markets, pension obligations, debt and other post-employment benefits amount to 36% of projected revenue for fiscal 2019.

S&P assigned a composite score of 2.2 to Connecticut, based on its scoring system of 1 for weakest, 4 for strongest.

Stabilizing or reducing fixed costs as a share of the overall budget and replenishing the rainy-day fund could result in a positive rating action, according to S&P analyst David Hitchcock.

"Such an event would likely require the state's economic performance to improve from currently sluggish levels," said Hitchcock.

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