How will Lamont and Stefanowski frame Connecticut's finances this time?
Connecticut’s budget will be a hot topic during the 2022 gubernatorial race. Democratic incumbent Governor Ned Lamont can be expected to focus on highlighting the large surplus, while the predicted Republican challenger Bob Stefanowski will likely point to the state’s growing debt.
WSHU’s Ebong Udoma spoke with CT Mirror’s Keith Phaneuf to discuss his article, “Best, or worst, of times? The battle to frame CT’s finances is underway,” as part of the collaborative podcast Long Story Short.
WSHU: Connecticut's long-term debt is expanding even as state budget surpluses reach historic levels. Could you explain what's going on, especially as you say this might create a problem for future taxpayers?
KP: What is currently dominating headlines is that state government is running surpluses again. Don’t get me wrong, that's a great thing. We have about $3 billion in our rainy day fund, our emergency budget reserve, which is about equal to 15% of the budget. That’s a good thing. But $3 billion is small compared to $75 billion in long term debt that we had 5 years ago, and the $95 billion in long term debt that we have now. The problem is that while our annual budgets have been running surpluses, part of the reason they've been running surpluses is we’ve been scaling back what we are required to pay into our pension funds. It's still going up, but not as much as it should be.
So, while we have been running up budget surpluses, we have been refinancing our pension debt. Basically, we’ve agreed to pay in less than we were originally planning to. But when you do that, that means future generations, when they get older, they're going to have to pay all the difference, everything between now and the next 15-20 years that we didn't pay in that we should have. They will have to make up that, plus all the lost investment opportunity, all the earnings that we didn’t achieve by depositing that money in the pension funds because if you don’t deposit it, you can’t invest it. They’ll have to make up what we didn’t put in, the earnings we missed, the earnings on the earnings, the earnings on the earnings on the earnings, and so on, compounded over to 15-20 years. That gets you into the billions of dollars.
WSHU: So how is this being used to frame this year’s gubernatorial election, considering that incumbent Democrat Ned Lamont is the first governor to achieve the legal maximum rainy day fund allowed by the state?
KP: I don’t think either side wants to give everyone the full perspective. The reason we refinanced these pensions is that we saw the projections. By the late 2020s, we were going to have to put so much money into our pension funds that it was just going to be leeching resources away from everything else people care about: schools, healthcare, transportation. Instead of going there, more of that money would end up going into the pension fund. At some point, we knew we had to refinance them, but while we were in the pension funds smoothing out the payments in the late 2020s we also said, “we could use a break today.” Since we’re already asking our kids to help us with the late 2020s, they can help us with a break now as well. Then, we turned around and lowered them lower than they should have been for the years we’re in right now. The amount of refinancing we did is probably what Lamont and Bob Stefanowski are going to be battling about and trying to figure out how to explain to the voters.
WSHU: Now you just mentioned Bob Stefanowski. He lost to Lamont in 2018 and he is likely to be the Republican challenger again this year. What’s he saying? And let’s talk a little bit about the fiscal cliff that is possibly going to happen when federal funding runs out.
KP: I think what Stefanowski is doing is the same thing Lamont is doing. They’re trying to give a very short version, which doesn’t have all the perspective. Lamont will boil it down very quickly to, “we’re running up big surpluses, and that’s all you need to know.” Stefanowski will say, “our overall debt has exploded and we’ll be paying it off until about 2050, and that’s all you need to know.” The truth is somewhere in the middle. What that means in the short term is, both people are going to try to see if their message, in the case of Lamont, makes people optimistic, or in the case of Stefanowski, scares them more.
I should have mentioned what that did give us, is some more predictability in the budget. We know at least where the pain is coming from, but we’ve only seen under this refinance system what good economic times look like with the stock market. Once we go into a real, traditional recession, where the stock market plunges, then we’re going to see what a bad state budget looks like.
WSHU: The past four years, it’s been an up market all the way through?
KP: Correct. When you mentioned the cliff, right now, if the upmarket trends continue, that cliff is not that bad. The market has kind of whittled that cliff down to a speedbump. The budget we’re in right now, the two-year cycle is being propped up with about $3 billion in federal money. Believe it or not, the projected surpluses for the next two years would be enough to smooth out most of that $3 billion. When the federal money goes away, we’ll have state money to replace it. If, however, for example, the war in Ukraine, if that really gets the stock market to continue to plunge you could see state tax receipts drop off very quickly. And when they drop off very quickly not only do tax receipts go down, but the amount of money you have to put in the pensions go up, because the pension contributions are determined by how the contribution investments are doing, and they’re all invested in the stock market. So it can turn very fast.
WSHU: So bottom line: it’s the best, or worst of times, depending on how you look at it.
KP: The answer is both.