Is Connecticut saving too much money?
Connecticut has accumulated a surplus of approximately $2 billion from federal COVID relief. Governor Ned Lamont is weighing spending the money on lingering issues related to the pandemic, or saving the money to offset the state’s long term pension debt.
WSHU’s Ebong Udoma spoke with CT Mirror’s Keith Phaneuf to discuss his article, “CT’s government was once broke. Is it now holding on to too much cash?,” as part of the collaborative podcast Long Story Short.
WSHU: A few years ago, you wrote a series on the legacy of government debt in Connecticut. Now, you’re talking about the question, “Is Connecticut’s government holding too much cash?” How did that come about?
KP: I think you're probably not the first person to ask that question, especially after the decade of the 2010s, which were just marked by stories about budget deficits. Everywhere you turned it seemed that the state government was hemorrhaging red ink. I think it's important that we don’t lose perspective.
What we're talking about now when we say the government has too much cash is we have about $3 billion in the state's rainy day fund. That's enormous when you consider that five years ago we had almost nothing. We’re talking about possibly finishing with more than $2.5 billion in surplus this year, which is certainly better than finishing in deficit.
The perspective we can't lose track of is that the state government still has over $95 billion, money it owes on bonding, pensions and retirement healthcare programs. So, yes, in the short term, there is more money floating around to cover this year's budget and next year's budget than ever before. But over the long haul, Connecticut still has a tough road ahead.
WSHU: So basically, we have a lot of cash on hand. So now we have competing interests that are vying on how to spend the money. Progressives want it used to improve social safety net programs; conservatives want tax cuts; and business interests want it used to replenish the unemployment trust fund and stimulate business. How are lawmakers and Governor Lamont going to work all of this out?
KP: Not easily. And the reason I say that is because you mentioned all of the stakeholders at the table, but there’s one other thing that I should have mentioned going into this — that is the pandemic has really complicated all of this.
When we’re talking about the pots of cash, the projected budget surplus, the rainy day fund: we should also mention that the two-year state budget that we’re in right now, that covers this fiscal year and next, is being supported with about $2 billion of emergency federal pandemic relief. That money is significant because, if you think about it, we are expecting when this budget cycle is over to have a couple of billion dollars left over.
I know I’m asking people to do math in their heads but think about this. About $2 billion of federal money that isn’t normally there comes in, and there’s going to be about $2 billion left over. I don’t want to say we’re laundering the federal money, but the federal money is the projected surplus. You might say in 99 cases out of 100, whenever you have found money, and you have all this long-term pension debt, shouldn’t we save that? Shouldn’t that go into the rainy day fund, or if that’s full, into the pension funds? Again, 99 times out of 100 you could argue yes.
But this isn’t money we got from a rich uncle we never knew, who died and put us in his will. This is money the federal government gave us to solve the pandemic crisis. So if we’re going to save it, we better be able to show: well the only reason we’re saving it is that we’ve met every problem the pandemic created. We’ve solved every need that hospitals, schools, healthcare, and social services, large and small businesses have, and that’s why everybody is fighting. Because some people feel we’re still on track to hold too much money in a COVID world.
WSHU: But it’s an election year. And basically, Lamont and most lawmakers are seeking re-election. We have to have some type of resolution to this, and it has to be something that they feel that taxpayers would appreciate. So what can we expect?
KP: I think you’re right. I think we’re absolutely going to see some tax cuts. I think the key is going to be where they are aimed. Everybody seems to be in agreement that we’re going to be doing some kind of cutting of gasoline taxes. Polling has long shown that tax increases at the pump anger voters more than a tax increase of the same amount in some other place because they’re reminded of the gas price so frequently because we all have to fill up our cars. I think some of the progressive Democrats would really like to do more for Connecticut’s urban poor. I think Lamont and many of the Republicans are aiming for more of the middle class. The governor has talked about expanding the property tax credit within the state income tax, which is something that would help primarily middle-class taxpayers. The Republicans in the Senate would really like to lower the sales tax rate, that’s something that would help everyone, but really the sales tax is primarily paid by the middle class.
WSHU: So, right now we are talking about a spending problem, not a revenue problem.
KP: Right now. But remember, all it takes is a traditional recession, one where the stock market plunges, and it's a sustained plunge, and we’re probably having a slower rebound. More like what we saw in the Great Recession of 2008 and 2009 and it took us so long, and we never fully recovered. When that happens, then you will see revenues drop off, you will see these surpluses disappear. You will also see our required contributions to the pension fund go up. That will put more pressure on the budget because as pension investment earnings go down, which they do when the stock market plunges, the state has to contribute more. So, the economy will take care of these surpluses through its own natural cycles. There will be good times and bad times. But the overall pressure of this pension debt is going to be with us for decades to come.
WSHU: So, bottom line is, Connecticut has a problem with too much cash on hand and what to do with it.
KP: For now.