Senate Democrats unveiled a new plan Thursday to stabilize future state budgets, while conceding that stability might not arrive for many years, given the massive unfunded liabilities Connecticut faces now.
And that plan has some similarities to one enacted into law just two years ago.
What’s changed since then?
Red ink in the state budget has swelled, and public awareness of the impending fiscal crisis has grown.
“We got into trouble, in part, because for years we increased our reliance on one group” of taxpayers, Sen. John Fonfara of Hartford, Senate Democratic chair of the Finance, Revenue and Bonding Committee, said.
That “group” are some of Connecticut’s wealthiest households, particularly those who pay their income tax quarterly on earnings from capital gains and dividends.
For decades, state government promised significant retirement benefits to public-sector workers on the unspoken assumption income taxes from this group — which frequently boomed in the 1990s and 2000s — would do so indefinitely, Fonfara said.
Further compounding matters, Connecticut never saved adequately for those benefits, forgoing significant investment earnings and thereby massively increasing the cost.
Fonfara: CT must change budget habits now
Fonfara said it is “critical” that state officials build new habits now and assume more modest growth from investment-related tax receipts when building its budgets.
The Senate Democratic plan would cap the amount of annual revenue from quarterly income tax filings that could be used to support most areas of government spending at $3.1 billion.
Any growth beyond that limit could be used only to: bolster budget reserves, reduce pension and other retirement benefit obligations; or reduce the need for borrowing for capital projects.
“There is no question this will rely on discipline, Fonfara said.
“By eliminating the volatility and unpredictability of our budget process and instituting structural reforms, we can stabilize our budget, responsibly pay down debt and build a robust Rainy Day Fund,” Senate President Pro Tem Martin M. Looney, D-New Haven, said.
When will that happen? “In the out-years,” Looney responded,
But those might be the way-out years.
Because contractually obligated retirement benefit costs in the state budget already are projected to grow massively between now and the early 2030s, overall state spending is expected to grow dramatically.
According to a study by the Center for Retirement Research at Boston College, annual contributions to the teachers’ pension fund are on pace to grow sixfold, leaping from $1 billion this fiscal year to more than $6.2 billion in 2032.
Even after refinancing payments owed to the state employees’ pension system — and passing $14 billion to $21 billion in costs onto a future generation — Connecticut’s annual contribution to this program will grow almost 40 percent over the next five years.
And there still is no solution for the worst-funded benefit program, retiree health care.
The state essentially saved nothing for this benefit until 2009. For decades, governors and legislatures placed responsibility for the retirement health care costs of their generation’s workers on future taxpayers.
Even now, the state sets aside less than one-quarter of the amount of its needs each year to fund the retirement health care it promises to present-day workers.
Fonfara acknowledged that the best the Senate Democratic plan might be able to do over the next decade-and-a-half is mitigate a painful situation, and then lay a foundation for much more stable budgets after that.
Legislature delayed Lembo’s push for reform
This isn’t the first blueprint to attempt the something similar.
The Democrat-controlled Senate and House adopted a similar plan offered in 2015 by Comptroller Kevin P. Lembo.
This one also restricted the use of capital gains-driven income tax receipts and forced state government to use some to build reserves and pay down debt.
Unlike the new plan, the 2015 legislation only would be mandated transfers to the budget reserve when state finances were in surplus. Fanfare’s proposal requires deposits into the Rainy Day Fund or extra debt payments whenever capital gains-related tax receipts top the threshold level — regardless of any surplus.
Lembo had recommended imposing these limits right away, but legislators agreed to delay implementation of these new restrictions until 2020.
Thursday’s press conference by Senate Democrats “recognizes the urgency of establishing state budget predictability and its stability,” Lembo said. “It’s unfortunate that when my initiative passed … its effective date was delayed.”
Senate Republican leader Len Fasano of North Haven said, “Today’s press conference was an effort to deflect from the fact that Democrat lawmakers have yet to show any clear path out of the disaster they created. Thus far their change in rhetoric hasn’t been matched with a change in action.”