State government took major steps over the past three years to reverse a dangerous trend of escalating debt and while it might take a little longer for the good news to filter down to the state’s official record, the signs have begun to show.
Efforts to curb pension debt in particular have budget analysts optimistic that state finances won’t be in shock two years from now when federal COVID relief expires.
At first glance, the news does not appear promising. Fiscal Accountability reports filed Friday by state analysts show a whopping $95.4 billion in long-term debt, a daunting figure that’s up 4.1% over the past year. More importantly, that appears to continue the trend that saw unfunded obligations increase 42% between 2013 and 2020 while the state refinanced its pension debt three times.
But the good news lies in the fine print.
Those numbers cover only the last official valuation of the pension funds for state employees and teachers — meaning they don’t include more than $1.6 billion in supplemental payments the state made using budget surplus this fall.
Applying these payments alone brings the debt growth below 2.5%.
And the latest reports also don’t fully account for a stock market that has helped pension investments surge. The Dow Jones Industrial Average closed at nearly 35,602 last Friday, when the fiscal accountability reports were released. That’s 20% higher than it closed one year ago at this time.
“We are making great progress,” Sen. John Fonfara, D-Hartford, co-chairman of the Finance Committee, said of the reports. “I’m just cautious because no one predicted we’d be where we are.”
Omnibus projections of spending, revenue and other fiscal trends are due annually in late November to help lawmakers prepare for the upcoming General Assembly session.
The potential to hold the line on debt growth now is huge, Fonfara said, adding that Connecticut has many years of work still to do to redeem its fiscal past.
“Whatever we decide to do [next], it should be done with a full appreciation of where we are today and where we will be for many years to come, unfortunately,” he said.
Having under-contributed to its pensions for more than seven decades running through 2010, Connecticut carries more pension debt per person than almost any other state. Required contributions to the pension funds already approach $3 billion and consume 14% of the General Fund, leeching resources away from education, health care, transportation, municipal aid and other core programs.
But the $1.7 billion extra Connecticut has deposited into its pensions over the past two years likely will pay dividends soon, analysts wrote.
Those extra dollars — plus all of the extra investment earnings they will achieve — will boost the value of the two major pension funds over time. And when the values go up, the required annual payment often goes down.
“An encouraging note in the out-years,” the legislature’s nonpartisan Office of Fiscal Analysis wrote in its report, “is that revenue growth outpaces fixed-cost growth.
“Fixed costs are projected to increase less dramatically,” added Lamont’s budget agency, the Office of Policy and Management.
When legislators adopted a new, two-year state budget in June and supported it with more than $2.6 billion in emergency federal coronavirus aid, nonpartisan analysts warned of the inevitable fiscal cliff Connecticut would face once that relief expired in July 2023.
But thanks not only to stronger pension funds but also a surging stock market, analysts have downgraded that fiscal cliff to still-steep-yet-manageable budgetary hill.
State finances, unless adjusted, still face a built-in deficit of about $930 million in the 2023-24 fiscal year, a gap equal to 4% of the General Fund.
But Connecticut also holds a record-setting $3.1 billion in its rainy day fund, more than enough to cover the shortfall.
That reserve is due largely to a savings program that enabled the state to take advantage of the recent good fortune on Wall Street.
Enacted in 2017 through a bipartisan compromise, the program restricts legislators from spending income tax receipts tied to capital gains and other investment earnings once they exceed about $3.1 billion in any given year.
And once the rainy day fund has been filled to its legal maximum and nothing more can be saved, any budget surpluses must be used to pay down pension debt. The funds can’t be used for anything else unless 60% of both the House and Senate agree. No attempt to redirect the funds has been attempted so far.
But surpluses averaging more than $1.5 billion are projected for both this fiscal year and next, prompting some legislators and Lamont to talk about cutting state taxes.
Fonfara, whose committee has jurisdiction over all tax legislation, said that’s fine for discussion, but Connecticut cannot afford to be satisfied simply at slowing or stopping the growth of its massive debt.
Pension contributions, other debt payments and Medicaid expenses — all fixed or largely fixed costs — consume more than half of the state budget, he noted.
“When people ask why we can’t do X, why we can do Y,” Fonfara added, “it’s because half of every dollar … is already spoken for.”