When state officials use the bulk of last fiscal year’s $1.9 billion surplus to reduce pension debt this fall and winter, it will raise total supplemental payments into those cash-starved funds to nearly $7.7 billion in just four years.
More importantly, Gov. Ned Lamont’s budget office projected this week that the cumulative impact of those extra payments will take huge pressure off state finances.
Required annual pension contributions should be $655 million less in the next two-year budget cycle than they otherwise would have been had Connecticut not dedicated its savings to reducing debt.
“Obviously we are in a good place, and it took a while to get there,” said Office of Policy and Management Secretary Jeffrey Beckham, Lamont’s budget director. “It took a decade of sluggish and difficult economies and budgets.”
Beckham is referring to the string of budget deficits between 2009 and 2017 that plagued Lamont’s predecessors, Govs. Dannel P. Malloy, a Democrat, and Republican M. Jodi Rell.
The 2017 legislature moved to change that with a bipartisan reform package that not only included new caps on spending and borrowing, but also two programs that forced lawmakers to save more — particularly volatile income tax receipts tied to capital gains and other investment earnings.
Those reforms, coupled with a stock market that boomed, helped Connecticut boost its rainy day fund over the past six years from about $213 million to $3.3 billion.
The smaller figure represented a paper-thin emergency reserve slightly larger than 1% of the General Fund, while the $3.3 billion equals 15% of the fund — the maximum allowed by law.
Lamont, who inherited this system when he took office in January 2019, has fought repeatedly to maintain it.
“We’re very pleased to be stewards of that period and we’ve maintained the discipline,” Beckham said. “The governor has made the fiscal guardrails a hallmark, a lodestar for how we conduct ourselves.”
To prevent future legislatures from repealing these guardrails, the 2018 legislature pledged in the covenants with its bond investors not to do so for five years. The state borrows billions of dollars annually for capital projects by issuing bonds on Wall Street and these covenants — which also define interest rates and terms of repayment — carry the same legal force as contracts.
In February 2023, Lamont and the General Assembly agreed to extend this so-called “bond lock” protection for at least another five years. Technically, the new bond covenant language extends the guardrails for 10 years, though lawmakers have the option to terminate them in 2028.
“Connecticut’s fiscal responsibility continues to create real results while paying down our pension debt and spurring job growth,” state Comptroller Sean Scanlon said this week, noting that the state gained 19,200 jobs so far this year after gaining 26,800 in 2022. The number of unemployed is below 70,000 for the first time since August 2019.
Scanlon’s office won’t complete its audit of the 2022-23 fiscal year, which closed last June 30, until later this month.
But the comptroller confirmed the administration’s projections of a $1.9 billion surplus for the just-completed year. This represents the second-largest surplus in state history.
And with the rainy day fund at its legal maximum, nearly all of that windfall will go into the pensions for state employees and teachers.
Similar supplemental deposits into the pensions in recent years, according to the Office of Policy and Management, included:
- $4.1 billion in 2022
- $1.6 billion in 2021
- $61 million in 2020
And Connecticut may not be done.
Though the current fiscal year isn’t even three months old, Lamont and lawmakers built the current budget to again run significantly in the black.
The governor’s budget office estimates the state will close next June 30 with almost $1.1 billion left over and though the global economic picture remains uncertain, Beckham said finances remain strong now.
“We think those [surplus] numbers, at this moment, are good,” he added. “I don’t see any evidence that we’re not on track to meet our projections.”
But despite state government’s fiscal prosperity since 2018, Connecticut’s finances viewed over the long haul aren’t as rosy.
Connecticut failed to save adequately for its pension funds for more than seven decades between 1939 and 2010, forfeiting billions of dollars in potential investment earnings in the process.
Its health care program for retired state workers is in even worse shape. And contributions toward that program — from the state and from its workers — represent only a fraction of the annual cost.
Connecticut is one of the most indebted states per capita in the nation. Unfunded pension and retiree health care program obligations, coupled with outstanding bonded debt, totaled more than $88 billion entering 2023. And nearly $40 billion of the $88 billion was unfunded pension obligations.
Even with the recent supplemental payments, pension obligations and other debts are expected to place significant pressure on state finances throughout the 2030s and possibly later. The $6.5 billion Connecticut must contribute this fiscal year to retirement programs or to make required payments on bonded debt will eat up nearly 30% of the entire General Fund.
Some legislators also may be looking to alter Connecticut’s savings system in the coming years, albeit not dramatically.
Progressive Democrats have argued in recent years that the spending cap — which is designed to keep budget growth in line with inflation and household personal income — is too restrictive.
This cap, they say, doesn’t allow Connecticut to adequately respond to extreme situations, such as problems created since 2020 by the pandemic or the 40-year-high in the national inflation rate reached in the summer of 2022.
The cap system also doesn’t take into account that surging pension costs, stemming from prior decades of inadequate funding, leeched resources away from key programs such as education, health care, municipal aid and transportation throughout the 1990s, 2000s and 2010s.
A progressive group featuring several former state and municipal government officials, 1,000 Friends of Connecticut, argued these guardrails are blocking property tax cuts. Specifically, the spending cap restricts aid to cities and towns — which count as a state budget expenditure — and those potential grants could be used to reduce local mill rates.
In recent years, majority Democrats in the House and Senate have insisted on carrying forward a portion of the annual surplus into the next fiscal year’s budget.
For example, last fiscal year’s $1.9 billion surplus would have been $340 million larger had lawmakers not carried that smaller amount into the new budget cycle to bolster funding for public colleges and universities, the nonprofit agencies that deliver the bulk of state-sponsored social services to people with disabilities, and to federally qualified health clinics.
And because those surplus dollars technically were appropriated this fiscal year, they won’t count against the spending cap in the coming biennium.
Conservatives say this amounts to little more than an end run around the spending cap.
House Speaker Matt Ritter, D-Hartford, and Senate President Martin M. Looney, D-New Haven, believe these carry forwards are necessary to preserve core programs and said they likely will continue over the next few years, as long as surplus remains available.
House Republican leader Vincent J. Candelora, R-North Branford, doesn’t want to alter Connecticut’s savings programs or to stop using the savings to reduce debt.
But Candelora does want to see change in how Connecticut uses that savings.
As surplus is deposited into pensions — thereby limiting growth or even reducing the required annual payment into the pension — the savings shouldn’t be redirected into other programs, Candelora said.
Instead the focus should be on using that savings to cut taxes.
Lamont and the legislature this June ordered the first state income tax rate cut since the mid-1990s. This change, coupled with adjustments to credits, should save taxpayers about $500 million per year.
But Candelora said that while state government has prospered in recent years, middle class families have not and still need far more relief.
The reason Republicans insisted on budget reforms in 2017 “was actually born out of the notion that Connecticut residents were overtaxed,” he said. “We needed to reduce our unfunded liabilities not so we could spend more, but so we could provide tax relief back to the taxpayers.”
But the focus at the Capitol in recent years has been on finding ways to get more dollars into programs rather than households, Candelora added.
“This money can’t get spent quick enough,” he said, “and I think that’s dangerous.”