By Joseph De Avila

HARTFORD -- Connecticut Gov. Dannel Malloy Wednesday called on state labor unions to make concessions to help close a $1.5 billion budget deficit and also called for changes in how public education is funded in the state.

In his annual state of the state address, Mr. Malloy, a Democrat, said pension obligations for state employees and unions would rise by $360 million in the fiscal year that begins in July and pressed public employees to help close the state's funding shortfall.

"These changes can and should be reached respectfully, and at the bargaining table," Mr. Malloy said. "Our state must honor its legal obligation to our public servants and state retirees, while at the same time keeping our promises to Connecticut taxpayers."

The call for unspecified concessions from state employees were part of a call for a shrinking of the state government generally because, as the governor said, the state "can't afford to continue doing everything we've done in the past."

Mr. Malloy enters the 2017 legislative session with his party still in control of both the state House of Representatives and state Senate, but with the slimmest lead of his tenure, which began in 2011. Democrats control the state House of Representatives 78 to 72. Republicans and Democrats hold an equal number of seats in the state Senate, but Lt. Gov. Nancy Wyman, a Democrat, can cast a tiebreaking vote.

Republican lawmakers said they were cautiously optimistic and were reassured by the governor's address and his call for greater predictability in the state's finances.

"He must have taken the House and Senate Republicans playbook," said Republican House Minority Leader Themis Klarides. "I hope that he will stick to that."

The Connecticut Business and Industry Association applauded the concession proposal and Democratic Senate Majority Leader Bob Duff said the state doesn't have many other options. "If there aren't concessions, there will be more layoffs," Mr. Duff said.

Labor officials, however, said the state should consider raising taxes on the state's wealthiest residents before considering asking public employees to make concessions.

"We are not willing to be scapegoats or political cover for legislators unwilling to make better choices," said Sal Luciano, executive director of Council 4 Afscme.

The governor also said the state should recalculate how it allocates educational funding to towns and cities to guarantee an equal access to quality education regardless of where students live. The move follows a September state court ruling which found Connecticut's funding method for public schools violated the state constitution and ordered the state to devise a new funding formula.

The ruling followed a lawsuit filed against the state in 2005 by a coalition of cities, school boards, parents and their children seeking to address funding disparities between well-off and low-income districts. Connecticut's Supreme Court said it would review the case and issued a stay on lower court's order.

Mr. Malloy didn't specify how the funding formula should be altered but said that change should happen. "Our state constitution guarantees it, and our moral compass demands it," he said.

Democratic Speaker of the House Joe Aresimowicz said finding the votes to pass an education funding overhaul will be tough.

Mr. Malloy also asked the state Legislature to support his proposal to modify how the state fund's its main pension system. The governor and a coalition that represents state employees said in Decemberthey reached an agreement where the state would pay smaller annual pension payments but over a longer period.

The deal means that state pension payments now will peak at $2.4 billion in 2032 while previous estimates said it could have ballooned to $6.65 billion at that time. Mr. Malloy says the state wouldn't have been able to afford that without making steep spending cuts. That state currently pays about $1.5 billion annually to fund its pension obligations.

While the changes to the pension funding could be brought to a vote in the state Legislature, if lawmakers fail to vote on the matter, it automatically will go into effect in February.

Write to Joseph De Avila at joseph.deavila@wsj.com

(END) Dow Jones Newswires

January 04, 2017 15:45 ET (20:45 GMT)

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