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Best, or worst, of times? The battle to frame Connecticut’s finances is underway

Connecticut Gov. Ned Lamont delivers the State of the State address during opening session at the State Capitol, Wednesday, Feb. 9, 2022, in Hartford.
Jessica Hill
Associated Press
Connecticut Gov. Ned Lamont delivers the State of the State address during opening session at the State Capitol, Wednesday, Feb. 9, 2022, in Hartford.

After walking a budget tightrope with no safety net for most of the past two decades, Connecticut state government has socked away almost $4.8 billion since 2018 and could nearly double that by mid-2023.

But while that’s three-and-half times what Connecticut saved in the prior 25 years combined, the state’s debt has somehow gotten worse — by a lot.

State officials secured short-term prosperity and less volatile finances for the foreseeable future by adding billions in long-term obligations to do it — a problem future generations of taxpayers may come to resent.

And as November’s state-wide elections near, the battle to frame the state’s financial outlook — as the best of times or the worst of times — is only expected to intensify.

Huge surpluses and extra pension payments

At the Connecticut Business and Industry Association’s Jan. 21 economic summit, Gov. Ned Lamont was optimistic.

“We’ve had a surplus three years in a row. That doesn’t very often happen,” he said. “Right now, we’re strong.”

Lamont, who took office in January 2019, has some good reasons to say that.

Taking advantage of a new savings program the legislature ordered in 2017, the Democratic governor has kept the budget balanced and avoided major tax hikes.

That’s a sharp contrast from the 2010s, a decade plagued by deficit forecasts and remembered for two of the largest tax hikes in state history.

Connecticut, which muddled through most of the past decade with no fiscal cushion, achieved the legal maximum rainy day fund allowed by law under Lamont, 15% of annual operating expenses, which amounts to about $3.1 billion.

Equally unprecedented, Connecticut is poised to dump billions of extra dollars into its cash-starved pension funds in just a few years.

With the rainy day fund full, the state hit another first under Lamont last fall, shifting a $1.6 billion surplus from the 2020-21 budget year into the pensions. That’s on top of the $2.9 billion in regular contributions already budgeted for pensions for state employees and municipal teachers.

And with analysts projecting another $4.4 billion in black ink across this fiscal year and next combined, the pension funds could see a short-term infusion of cash like never before.

The governor predicted that once those extra payments are made, the state’s regular, required pension contributions could drop significantly. That means hundreds of millions of dollars that could support education, health care, transportation, municipal aid or tax relief.

Those surplus projections have been fueled in part by a stock market that has largely been robust since 2018, despite a rough first month in 2022.

“Connecticut’s economic recovery and fiscal health continue to improve,” state Treasurer Shawn Wooden, a Hartford Democrat, said in February, adding that the state’s cash flow, and not just the surplus, is at a historic high as well. “This gives us the potential to continue to responsibly pay down Connecticut’s pension liabilities at an accelerated rate.”

Even as it saves more, Connecticut’s debt increases

But there’s another side to that coin.

Connecticut reported $95 billion in unfunded obligations last fall, a combination of bonded debt and unfunded pension and retirement health care responsibilities.

That’s almost 30% more debt than the state reported in 2016, before five years of balanced budgets, careful savings and an unprecedented supplemental pension payment.

Connecticut, which already ranked as one of the most indebted states in the nation, appears to have gotten worse.

“This is why people have a hard time trusting the people currently running our state government,” said Madison Republican Bob Stefanowski, who lost the 2018 gubernatorial race to Lamont and is hoping for a rematch this year. “Politicians making political calculations to protect their headlines, rather than protecting the state’s taxpayers and the bottom line.”

Some of that extra debt was really always there.

The legislature adopted more conservative assumptions about pension fund investment returns over the past few years — dropping them from an annual average of 8% or more to about 7%. Pension debt is calculated over 25 or 30 years, and lowering the assumed revenue from investments means more contributions must come from the taxpayers.

But that wasn’t the only change that affected pension debt. Governors and legislatures also refinanced the state’s pension obligations three times in the past four years.

Debt payments, involving both retirement benefit programs and bonding, consumed only 12% of the annual budget in the mid-1990s but were eating nearly 30% by 2017. The state had failed to properly save for its pensions for more than 70 years, forfeiting billions of dollars in potential investment earnings needed to cover benefits — and leaving the present generation to make up the difference.

Analysts warned finances would hit bottom around 2030, when spiking payments could be quadruple what they were in the mid-2010s, likely crippling most other programs and forcing unprecedented tax hikes.

Lamont and his predecessor, Gov. Dannel P. Malloy, worked with legislatures to smooth out those spikes, shifting billions of dollars in debt, plus interest, onto taxpayers in the late 2030s and 2040s.

But they didn’t just lower required contributions for the spike years that are still to come. They also restructured payments in the near-term, making their own budgets easier to manage — while shifting even more burdens onto future taxpayers.

For example, Lamont restructured the teachers’ pension so that Connecticut actually contributed $128 million less during his first two years in office than it had during Malloy’s last year on the job.

And the $2.9 billion Connecticut must contribute this year to the two major pension funds combined this fiscal year also is roughly $630 million less than the payments the state would be facing, had it not refinanced both pensions in 2019, according to actuaries’ projections from three years ago.

The minimum pension contributions the state had to make grew by almost 52% between 2012 and 2017. But over the last five years, they are up 36%.

In other words, some portion of the big surpluses Connecticut now enjoys stems from slowing down its payment of pension debt.

“It’s incomprehensible that our debt obligations have gone from $75 billion to $95 billion over the last five years while Gov. Lamont and the Democrats in charge of the legislature take their victory laps,” Stefanowski said.

Connecticut’s businesses are keeping a close watch on debt levels, but the jury is still out on whether everyone feels good about them.

“Our larger businesses are very aware of the long-term liabilities Connecticut has, and that it’s been a little bit of a noose around the neck,” said Chris DiPentima, president and CEO of the Connecticut Business and Industry Association.

And while the CBIA applauds the supplemental pension payments made over the past year and a half, he added, anything that makes state debt levels — and potentially future tax rates — likely to climb remains an impediment to business confidence and job growth.

House Republicans questioned whether pension refinancings couldn’t have been delayed until the late 2020s, saving Connecticut’s children huge burdens in the future.

“Politicians' memories are limited to the election cycle,” said House Minority Leader Vincent J. Candelora. “They fail to look holistically where we are as a state.”

Democrats: Fiscal good news extends way beyond surpluses

But while the overall debt level has increased, Lamont says Connecticut has gained something very valuable: fiscal stability.

For the first time in decades, state officials can look at the planned pension payments — significant though they are — and imagine a scenario in which Connecticut can manage them.

“When the state is making its full pension payment plus supplemental payments, it demonstrates to residents and businesses that the state is creating a predictable, sustainable and structural budget environment to increase attractiveness as a great place to establish roots,” Melissa McCaw, who stepped down earlier this month as Lamont's budget director, said in February.

The two-year budget Lamont and lawmakers enacted last June increases aid to cities and towns by nearly $200 million per year, on average, without imposing any major tax hikes. Without refinancing, those funds would likely have gone into the pension system, or taxes would have gone up.

And while other states are fearful of what will happen when billions of dollars in emergency federal pandemic relief expires two years from now, Connecticut has relatively little to worry about.

Analysts now project state finances for 2023-24 have a built-in hole of $520 million. But that doesn’t include another $680 million they expect to be captured by the volatility adjustment.

Those funds, plus the $3.1 billion in the state’s rainy day fund, would enable the next governor and legislature to easily manage state finances even without lost federal pandemic relief.

“We haven’t had a recession in a long time, and some of this prosperity is going to be throttled back” eventually, Lamont told business leaders.

With the exception of the pandemic-induced economic slump of 2020, Connecticut has not faced a traditional recession since early 2010.

“But with probably the biggest rainy day fund per capita … in the country,” Lamont added, “we’re relatively well prepared.”

Launched in 2010, The Connecticut Mirror specializes in in-depth news and reporting on public policy, government and politics. CT Mirror is nonprofit, non-partisan, and digital only.