An across-the-board pay increase for 27,700 state employees was shot down Thursday by legislators who rejected new labor contracts because they did not change the way workers are paid and health care costs are covered.

The 2 percent pay increase that was to go into effect in January -- along with higher employee health care co-pays and deductibles that would have taken effect sooner -- was scrapped by the GOP-led Legislative Subcommittee on Employee Relations. The panel voted 6-4 to reject the agreements, with Republican members voting against them and DFLers voting to approve.

A key sticking point for Republicans: Individual employee health premiums would continue to be paid entirely by the state, although employees do pay a portion of the premium for family coverage. Also, the contracts give automatic, yearly "step" increases for workers. Republicans favor merit-based pay increases.

"Shame on you!" union members in the audience chanted as the committee left the Capitol hearing room following the rare rejection vote.

"Today's union leadership are dinosaurs living in the past," said Sen. Mike Parry, R-Waseca, the panel's chairman.

The decision rekindled labor-management strife as a political issue, but is not the final word on the contracts. Since the unions have rejected the renegotiation Parry sought, the contracts are likely to go before the 2013 Legislature, whose makeup will be determined in November, when all 201 seats are on the ballot.

"See you at the polls, guys!" one union activist shouted as the meeting ended.

The contracts were described as modest and responsible by the Dayton administration, the unions and DFL committee members, but as financially unsustainable by Republican members. The agreements cover state employees belonging to the American Federation of State, County and Municipal Employees Council 5 (AFSCME) and the Minnesota Association of Professional Employees (MAPE).

The contracts include:

• A 2 percent, across-the-board increase for all workers beginning in January, which AFSCME said is the first across-the-board increase in three-and-a-half years.

• Increases in employees' health care co-pays, deductibles and co-insurance.

• Continuation of the state paying 100 percent of the employee's premium, and 85 percent of family or dependent coverage.

• Continuation of annual "step" increases for eligible employees, ranging from 2.7 to 3.5 percent, until they reach the top step. About half of employees receive them.

Parry and the subcommittee's vice-chairman, Rep. Steve Drazkowski, R-Mazeppa, said they wanted changes in the structure of state contracts, including a contribution by the employee to the individual insurance premium, use of performance pay rather than what they called "autopilot" increases, and reductions in the overall cost of the agreement spilling over into the next budget period.

While they said they were not calling on state workers to take a pay cut, they did want to equalize the status of public and private workers. They referred to private businesses that have laid off workers and reduced pay and benefits during the recession.

"The state deserves better than the same-old, same-old rubber stamp," Parry said of the committee's action. Union officials and members pointed out that they sustained $65 million in salary losses during last year's three-week government shutdown, which they said they haven't yet made up.

Unions defend deals

"Almost a year later, I'm still trying to catch up on bills," state transportation employee Mike Lindholt said after the hearing. "They're going to come with disrespect like this? This is disgusting."

Other workers said they have considerable out-of-pocket health care costs, disputing the GOP claim that they receive free care. Those costs averaged $814 per employee this year, AFSCME said, and were projected to increase under the new contracts. The unions said that when comparing education and experience levels, government workers already earn less than private-sector workers.

Parry, who clashed with Dayton earlier this summer by claiming the governor was popping pills during budget meetings -- which Dayton called a lie -- lashed out in similar fashion after Thursday's meeting. Without offering details, he criticized Dayton for "erratic behavior" during last summer's government shutdown and for the "irrationality" of the governor's position on the labor agreements.

Dayton said in a statement that Republicans were "playing pre-election politics" and costing the state money by not putting the contracts into effect immediately. "Republican legislators showed themselves more invested in their narrow, rigid ideology than in sound fiscal management," he said.

Jim Ragsdale • 651-925-5042