Gov. Ned Lamont. Frankie Graziano / Connecticut Public Radio
Gov. Ned Lamont Frankie Graziano / Connecticut Public Radio

Forget tolls, sports betting fees, or even marijuana taxes.

The largest bill proposed in the next state budget will be shouldered,  eventually, by Connecticut’s children.

Faced with another multi-billion-dollar budget deficit, Lamont and Democratic lawmakers are weighing whether to shift billions of dollars in pension debt — plus a hefty interest charge — onto the next generation of taxpayers.

Lamont’s idea, which he sketched out for lawmakers in February, would restructure the state’s pension contributions over the next 13 years to save roughly $9.1 billion.

Future taxpayers would have to replace that $9.1 billion plus all of the earnings today’s taxpayers forfeited by not saving and investing those funds on schedule.

In other words, for us to save $9.1 billion now, the next generation would be stuck paying an extra $27.2 billion.

“This is all screwed up,” said Rep. Anne Hughes, D-Easton, co-chairwoman of the House Democratic Progressive Caucus, who said Connecticut has other resources it could tap before mailing another bill to its children. “There are people who are willing to be part of the solution now.”

The alternatives, however, are vastly unappealing.

They include ordering the fourth state income tax hike in a decade, gutting aid to cities and towns, or raiding Connecticut’s reserves in the hope that the next recession is still several years away.

And while the new governor says Connecticut’s economy simply can’t bear another tax hike, some lawmakers are balking at asking the state’s youth for a second bailout in three years.

“There are no easy choices,” said Lamont’s budget director, Melissa McCaw. “But if we are to grow Connecticut and the solution is not to increase taxes, then difficult and unpleasant choices … have to be a part of the solution.”

A huge legacy of debt

What all sides can agree on is the scope of the problem.

Connecticut saved nothing between 1939 and 1971 — and very little from 1971 to the mid-1980s — to cover pensions promised to state employees and teachers.

Even afterward, legislatures and governors routinely short-changed contributions to the pensions until 2011, forfeiting billions of dollars in potential investment earnings over the decades.

A 2015 analysis by the Center for Retirement Research at Boston College warned that annual contributions to the state employees’ and teachers’ pensions — each of which stood at about $1 billion at the time —were on pace to exceed $6 billion separately and $12 billion collectively by 2032.

Some critics said this was an extreme projection, arguing the collective annual bill likely would peak closer to $7 billion or 8 billion.

Either scenario is a nightmare in the context of an overall state budget of about $21 billion.

Meanwhile, surging debt costs leech funding away from health care, education, municipal aid, transportation and other priorities.

McCaw, who inherited a state budget on pace to run $3.7 billion in deficit over the next two fiscal years, said Connecticut needs to take a break from income tax hikes.

Legislators and governors raised at least one of the state income tax rates in 2009, 2011 and 2015. They also reduced the property tax credit from $500 to $200, costing middle-class households hundreds of millions of dollars each year.

“The administration started with the lens of how do we posture Connecticut for growth,” McCaw said. “The governor felt that it was critical that the number one solution is not to simply increase taxes, and so his approach was to look at opportunities to drive down some of those fixed costs.”

Lamont proposed a “debt diet” to scale back bonding for non-transportation projects, along with initiatives to reduce Medicaid costs and other health care costs.

And then there were the pension funds.

‘Similar to … your home mortgage’

Put simply, Lamont want to restructure the state’s pension contributions over two periods — from now until 2032, and from 2033 to 2049 — for a savings of $9.1 billion over the next 13 years combined.

Pension payments would actually drop $367 million next fiscal year and then climb by 3 to 4 percent per year through 2032 — but not as sharply as originally planned.

Lamont also would reform the teachers’ pension by assuming a more realistic 6.9 percent average rate of return on investments, rather than the current 8 percent. This would also force annual contributions to grow in future years.

“This is similar to what you would do on your own home mortgage,” Lamont said while describing the concept in his Feb. 20 budget address to legislators.

But the governor left out the part about how much money would need to be paid back – $27.2 billion – or who exactly would pay that debt. Future taxpayers would have to replace that $9.1 billion plus all of the earnings today’s taxpayers forfeited by not saving and investing those funds on schedule.

In other words, for us to save $9.1 billion now, the next generation would be stuck paying an extra $27.2 billion.

Critics of the refinancing plan reject the mortgage analogy, noting that few parents strike a deal with the bank and then direct their kids to pay off the balance — especially one as hefty as $27.2 billion.

“I don’t find that credible,” said University of Connecticut economist Fred V. Carstensen, adding it’s effectively recommitting the fiscal sins of the past by short-changing pension contributions at a big expense in the future.

Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee, said she’s watched surging pension costs effectively drain dollars away from every program and service state government offers over the past decade.

“The biggest challenge we’ve faced is trying not to lose the budget, to lose the issues we care about, to the problems we inherited from our ancestors,” she said.

Rep. Toni Walker, D-New Haven CTMirror.org File Photo

But is deferring pension payments — and significantly inflating the debt in the process — only ensuring legislators will be sacrificing health care, education and other programs to cover pension debt until 2050, Walker asked.

When asked to respond to Walker’s question, those supporting the pension debt shift noted it’s a problem more than 70 years in the making.

“To ask taxpayers to fix it over the next 10-to-20 years, in that short of a time frame, is a difficult choice to make,” McCaw said.

For decades, Connecticut residents were served by state employees and municipal teachers, but left it to a subsequent generation to fund the retirement benefits of those workers.

And between the 1980s and the 2000s — when the state began trying to save for workers’ benefits before they retired — each generation of taxpayers left a larger bill for its children than the one it inherited from its parents.

Is it fair for present-day taxpayers to resolve more than $34 billion in pension debt amassed by several generations? asked state Treasurer Shawn Wooden, who worked cooperatively with the Lamont administration to develop the restructuring plan.

“I think the answer, unequivocally, is that’s not fair,” Wooden said, adding that “as a practical matter, it’s simply not affordable.”

Once contributions to the teachers’ pension alone potentially top $2 billion per year, as projected in the mid-2020s, “that’s not sustainable. … It’s not a realistic choice.”

Taxing the wealthy or spending reserves?

But are there other realistic options?

Progressive Democrats want the governor to drop his resistance to an income tax hike, provided it’s aimed at the wealthy.

The Finance, Revenue and Bonding Committee recommended a surcharge on capital gains earnings, but only on those households already paying the top state income tax rate. This would mean individuals whose overall income exceeds $500,000 per year, and couples topping $1 million.

The capital gains tax is projected to generate about $262 million per year.

Sen. John Fonfara, D-Hartford ctmirror.org

Sen. John Fonfara, D-Hartford, questioned whether this could be used to at least delay any talk of pension refinancing for a few more years.

“We deserve to at least know what the savings could be,” Fonfara said.

Former Treasurer Denise L. Nappier, Wooden’s predecessor, often cautioned against refinancing pensions, noting that deferring hundreds of millions in contributions could cost the state billions of dollars in lost investments decades later.

Republican legislators also have been critical of the refinancing deal.

Rep. Chris Davis of Ellington, ranking Republican on the Finance, Revenue and Bonding Committee, noted that Gov. Dannel P. Malloy and legislators already added billions of dollars to Connecticut’s pension debt when they approved a more modest plan to refinance the state employees’ pension fund in 2017.

Ten people who identified themselves as “wealthy Connecticut residents” wrote a letter to Lamont on May 14 asking him to raise income taxes on the most affluent, though they did not address pension debt.

Rep. Josh Elliott, D-Hamden, another member of the progressive caucus, said “the governor has consistently been saying ‘no, no, no,’” when it comes to taxing the rich. But Elliott added he fears many legislators don’t realize the alternative is billing Connecticut’s children.

“It really depends on the person,” he said. “We need to be discussing it more.”

But Democrats and Republicans also are staunchly opposed to raising taxes or reducing aid to cities and towns.

And many from both parties also have been reluctant in recent years to cut further into social services that were scaled back significantly over the past decade.

Tapping the rainy day fund?

So what other options are left?

Connecticut does have $1.2 billion in its budget reserve, commonly known as the rainy day fund. And projections have it swelling to a record-setting $2.65 billion by Sept. 30.

State Treasurer Shawn Wooden

Could legislators raid about $640 million of that reserve? That’s roughly equal to the portion of pension contributions due over the next two years that Lamont proposes shifting onto the next generation of taxpayers.

Even delaying the refinancing debate for two years could save the state’s next generation billions of dollars in debt.

Wooden said Wall Street’s credit rating agencies like that Connecticut has rebuilt its reserves after depleting them entirely during the last recession.

“That rainy day fund, and the fact that it’s now growing, that is a positive,” Wooden said. “It is positively viewed by rating agencies, by investors, so do we want to undercut that? I say no.”

Carstensen countered that Wall Street might accept Connecticut spending its reserves to delay or postpone a pension restructuring plan that amounts to borrowing at very high rates.

“Let’s slow down and think this through carefully,” he said. “Playing these games with our pension obligations is not going to serve us well.”

But McCaw said some perspective is needed when it comes to the state’s piggy bank. Though difficult to believe, $2.65 billion is not as much money as it seems. 

It still falls short of the 15 percent reserve level allowed under state law and recommended by Comptroller Kevin P. Lembo to safeguard state finances against the next recession.

That $2.65 billion represents 14 percent of annual operating costs based on the current fiscal year. 

“Folks get very excited when they see a $2.6 billion reserve,” McCaw said, but Connecticut entered the last recession with $1.4 billion socked away and “we needed well north of $3.5 billion to weather that storm.”

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Keith M. PhaneufState Budget Reporter

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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23 Comments

  1. Old saying that you can t get blood out of a stone. Ct is broke plain and simple.Its time the Ct politicians ask the feds to step in and go into receivership to make the hard choices they won t

  2. CT has $100 Billion in contractual obligations in the next 30 years that are largely unfunded. The reality is we will become insolvent long before our economy can grow enough to make up the difference and support a broader tax base. A bailout package is likely and the federal government will have very little sympathy for our over-spending so we will most likely lose our financial independence – as we should.

  3. Keith says the options “include ordering the fourth state income tax hike in a decade,
    gutting aid to cities and towns, or raiding Connecticut’s reserves in
    the hope that the next recession is still several years away.” How come the option of spending less money in the first place isn’t mentioned? How come our infrastructure costs are so high on a per-mile basis? “Connecticut doesn’t have a revenue problem, Connecticut has a spending problem.”

  4. An excellent overview that I believe is missing one important additional consideration.

    Barring a miracle in term of stock-market returns, if we did succeed, through some combination of higher taxes and austerity, at fully funding our teacher pension obligations by the completely arbitrary deadline of 2032, future CT residents would benefit beginning in 2033 from a windfall drop in annual pension payments from as much as ~$6 billion (per the article) to whatever the so-called “normal pension cost” for active teachers will be at that time (currently ~$250 million), which means State taxes would drop significantly and public services could be restored.

    In other words, in order to solve a problem we inherited from earlier CT residents, who unfortunately failed to pay the full cost of the public services they consumed, by the current completely arbitrary 2032 deadline, we would have to punish severely (through some combination of higher taxes and reduced services) anyone who stays in CT between now and 2032. Doing this would surely lead to further declines in population and tax base over the next 12 years, thereby eliminating any possibility that the State could generate the higher economic growth it so desperately needs after 30 years with no job growth.

    In still other words, opponents to extending the amortization period beyond 2032 are really advocating for what would surely become another famous “Pyrrhic Victory,” which Wikipedia defines as one that “inflicts such a devastating toll on the victor that it is tantamount to defeat.”

    1. In principle you are correct but we deserve to lose our financial independence until the bills are paid – we literally can’t trust Democrat leaders to run the state anymore. We already saw what they immediately proposed when Gov. Malloy AND Gov. Lamont talked about reducing debt (ultimately reducing services) – they get around it, either legislatively (veto override) or removal from authority – no real balance of power in CT. The majority refuse to change course even though it is obvious that progressive policy has failed business in Connecticut. There is a bigger issue with political arrogance in CT – these “part-time” politicians have the illusion of control but it’s just a mirage, control ends at the border.

      1. Oh good, let’s let the current federal administration run CT! They’ve done so well so far…record debt with tax breaks to the top earners. That way, the gold coast residents get richer…yeah, that makes sense.

  5. Can a state with no foreseeable growth for years withstand the teacher pension payments now scheduled?:
    No.
    It’s odd that the issue is being discussed as if there were a choice. The reporter seems to favor the view that the budget should be devastated until the payments fall to approximately nothing after years of deprivation. That can’t happen, not if a longer period of manageable payments is available.
    Additional taxes on the rich are not an answer, of course. That revenue will be used to reduce the current deficit, assuming the legislature can over-rule the Governor on one more issue.
    A state with heavy taxes and no growth has limited options.

    1. Nobody wants to move to CT. That is the problem. Raising taxes is sure not going to be a signal to others to come. The pension crisis is huge not just for CT, but many other states. There are 7 states that will never be able to pay those pensions. Blue states mostly. There are 75 million boomers. They will leave these high tax states in droves. Democrats have few options. All they know is to raise taxes on the few rich which drives those rich folks out. The pension obligations must be dealt with in a realistic manner.

      1. Why would a company move to CT?
        What advantages does CT have compared to the surrounding states which are growing?
        Meeting legal obligations to pay pensions is a separate question. The growing states also have substantial taxes.
        Better to discuss the growth problem. because that’s where a solution might be possible.

      2. But, but, but, but Gov Lamont and Greenwich Senator Bergstein have said companies want to come to Ct if we fix our transportation problems. So, Gov Lamont and Sen Bergstein, which companies? Show us the signed letters of intent from those companies’ Boards saying they will come to Ct. Show us other legally binding documents you have received from those companies saying they will come. Show us the penalty clauses in those documents if they don’t come. “if you build it, he will come.” was a nice line in a fictional movie. This is reality.

  6. What always seems to be left out of these discussions is that our revenue system seems quite dysfunctional. Using federal data, I evaluated how successful the sales tax and income tax are at securing revenue. SALES TAX COLLECTIONS ARE DOWN $220 MILLION AND INCOME TAX COLLECTIONS ARE DOWN $490 MILLION AS A SHARE OF THE RELEVANT TAX BASE, that is, as a share of aggregate household consumption and aggregate household income. Add those two numbers up: CONNECTICUT IS COLLECTING $710 MILLION LESS in revenue from its two primary taxes. On annualized basis, that is a shortfall of nearly $1.5 BILLION–which is about half of the projected fiscal deficit. Yet no one seems to be sorting this out and looking to understand why our taxes are generating less and less revenue relative to the tax base.

    And there is also the odd absence of a discussion of our bizarre, Swiss-cheese sales tax, with its hundred of exemptions and modifications, and billions in “tax expenditures” reflecting all the things it doesn’t tax. True, the sales tax tends to be regressive, but services in particular are consumed by higher income households, and thus tend to be progressive in incidences. And there are ways to mitigate the regressivity in any event. We simply aren’t having a robust discussion of our revenue system and its performance.

    The adjustments to the pension system are simply premature–nothing is going to change about that challenge in the next two years. Let’s be smart, have a serious assessment of our revenue system, and only then consider whether refinancing (yet again) of our pension liabilities is a good strategy.

    1. Fred – You have presumably been watching this for years so must have an inkling as to the answer. Could you give us a hint? Maybe an increasing boatload of the income attributed to CT taxpayers at the Federal level is actually being earned and taxed in New York by commuters living in Fairfield County?

      Unless you shove more on to property taxes (Fairfield County’s last competitive advantage versus Westchester) you can’t fix that dysfunction. And jacking Greenwich property taxes will only make them less competitive driving out even more residents.

      We’ve already driven out retirees or folks with options by jacking up income tax rates (Connecticut’s original competitive advantage) leading us to where we are, so let’s try property taxes next?

      Rather than trying to squeeze more out of the Golden Goose, maybe it’s time to have a hard conversation with the folks on the cost side of the Connecticut budget.

    2. $100 Billion in underfunded contractual liabilities benefits will not be fixed with tweaks to revenue. Prof. with all due respect, you already know that the only way to fix CT is RAPID economic growth designed to grow the tax base. Non-priority spending, mandates and ever growing tax increases continue to push the TOTAL COST of living too high making us less competitive.

      We need to drastically reduce Govt. services (25-30%) and grow the tax base (at least 15%) over the next decade to fix this issue. The accumulation of progressive policies protecting special interests and then going unchecked for literally decades has made our state less competitive. Worse, it continues today, with minimum wage, family leave, “free” health care, “free” college etc – it all sounds great if we could afford it. We can’t – just simple math that politicians continue to ignore to everyones detriment because “we are a rich state”.

    3. Perhaps tax revenues are down over the years as the result of the ongoing migration of residents to lower cost venues–80per day/approx. 29K per year. A recent article in the Hartford Courant showed that those residents moving out of Connecticut had a higher net worth than those moving into Connecticut, and as a whole, Connecticut is loosing population. There is no need to worry about “the children and grandchildren”, like the above 29K/per year, they will have moved out long before the pension bills come due.

  7. Connecticut’s debt problem has become pathetic. When our family moved back here in 2013, The Economist reported Connecticut’s public pension debt was third worst in the USA per capita. Six years later, we are in about the same spot. During that period I have seen at least half a dozen state-funded projects in our shoreline town that are of little or no economic benefit. Our town has also overspent on construction projects that are likewise of no lasting economic benefit. Unless we stop wasting money, we have no chance of getting a public consensus that we are taking our financial crisis seriously. I am really disappointed in our legislature. I would give them an “F” for financial maturity. If any of us ran our households or businesses in the same way, we would be bankrupt. Am I being clear?

  8. I don’t think the children will be worried about all this extra debt load. Many will be long gone to other states that do not treat its taxpayers like an ATM machine to feed its insatiable need to spend and tax.

    If you haven’t noticed, we’re in a fiscal death spiral in Connecticut. Its only a matter of time before all the fiscal tricks and shenanigans will blow up the state’s finances. Its a slow moving train wreck but it will happen.

  9. This is a good move by our gov’t. We should put this on our kids and tell them upfront that we are doing this. We are giving them time to get out of here before they get stuck with the bill. My kids are in high school and i have told them that there is no future here and they will have to move in the next 10 years.

  10. The pain of what we are facing today will be multiplied many times over for what our children will face in the future if this bizarre refinancing scheme is enacted. If our children are fleeing this state now, then no one will remain to pay the bill. Deal with it now by opening the SEBAC agreement, reducing the benefits, cutting state employment, increasing tax rates, forcing increases in property taxes, eliminate prevailing wage mandates on town projects, increasing income and sales taxes, etc, etc, etc. Confront this beast now.

    1. Jim, You do realize that the SEBAC agreement is a contract that cannot just magically be reopened? Unfortunately, state and teachers pensions have never been adequately funded. The bill has come due, and as you stated, the “beast” must be confronted. Kicking the can down the road is similar to what the current admin in DC is doing as well. The state, as well as the federal government needs to cut back on spending now and to stop caving to the top 1% and hammering the middle class.

  11. State finances in Connecticut will continue to deteriorate until there are serious reductions in state spending including fewer public employees, reduced levels of compensation and benefits, and dramatic restructuring / freezing of pension obligations. Until then, wealth and income will continue to leave the state, business activity will decline, and property values will stagnate,

    1. So let’s fire 15% of the state workforce, reduce pay to the rest of the state employees, and cut pensions to those on fixed incomes so the top 1% will stay in the state? Sounds like a great way to undermine the state’s infrastructure, put 7,500 people out of work, and add an untold number of people to the welfare rolls…brilliant! I can see how that would kick-start the state’s economy.

  12. Ned the contradicter. Bonding is awful and will burden future generations when he talks about the Repubs’ “Prioritize Progress” transportation plan. Now, bonding and putting a burden on future generations is OK with Ned. Does anyone wonder why he isn’t trusted by Ct citizens?

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