By using billions of budget surplus dollars to pay down pension obligations, state officials hope soon to redirect $440 million annually from debt to other programs, Gov. Ned Lamont and Comptroller Natalie Braswell announced Thursday.
But whether all of that savings actually translates into new investments, tax cuts — or both — may well hinge on the tumbling stock market. As the value of Connecticut’s pension fund investments shrink, required annual contributions to the system traditionally rise.
“By prioritizing paying down the state’s pension debt, we’re removing an economic anchor that threatened to hold back Connecticut’s long-term growth,” Lamont said.“We’re now seeing jobs return across the state and earning a national reputation for our fiscal responsibility.”
After underfunding its pensions for state employees and municipal teachers for more than 70 years, running through 2010, Connecticut asks present-day taxpayers to cover this legacy of debt while also saving for the pensions of current public-sector workers. As a result, required pension contributions — which total $3.15 billion in the new state budget that began July 1 — consume a hefty 14% of the General Fund.
Lamont and the General Assembly have tried to reverse that. Besides making the full required pension contributions over the past three fiscal years, they’ve earmarked an unprecedented $5.4 billion in surpluses to accelerate retirement of pension debt. That includes $61 million in 2020, $1.6 billion in 2021, and a whopping $3.7 billion left over from the fiscal year that closed June 30.
Those supplemental payments — and the potential investment earnings they will generate over the next two-and-a-half decades — mean the state should be able to shave $443 million off its annual pension bill by July 2023, according to a new analysis from Cavanaugh-Macdonald Consulting of Kennesaw, Ga., the state’s pension actuaries.
“The painstaking work of getting Connecticut’s fiscal house in order continues to pay off for taxpayers,” said Braswell, who released the analysis. “As economic volatility impacts all aspects of everyday life, the state’s budgetary situation is increasingly stable and still improving.”
But Connecticut, with more than $90 billion in unfunded pension and retirement health care obligations and bonded debt, remains one of the most indebted states in the nation on a per capita basis.
That’s significantly more than the $74 billion in total debt the state reported in 2016, shortly before the state began amassing budget surpluses.
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% — and thereby lowering the overall value of pension assets.
But Lamont and his predecessor, Gov. Dannel P. Malloy, also worked with lawmakers and unions to refinance pension obligations three times between 2017 and 2019. This involved artificially lowering required payments, both in the late 2010s and in the early 2020s, and shifting billions of dollars in debt, plus interest, onto taxpayers in the late 2030s and 2040s.
Now, with the national economy flirting with recession, will faltering stock prices push required pension payments upward, mitigating some of the budgetary flexibility Connecticut just made?
Lamont said he fears the Federal Reserve’s recent decision to boost interest rates could push the economy toward recession, even as it helps to slow inflation.
But even if a recession occurs, the governor added, state government is well positioned to weather an economic downturn.
The state will work this fiscal year with a $3.3 billion emergency reserve, the highest rainy day fund in state history. And at 15% of annual operating expenses, it’s the largest allowed by state law.
Lamont and his fellow Democrats in the legislature’s majority ordered more than $660 million in tax relief this year, one of the largest tax reduction plans in state history. But Republican lawmakers and GOP gubernatorial candidate Bob Stefanowski both point to the rainy day fund and say Democrats could have done more.
“When I go around the state, I hear from people who are making decisions about whether to put gas in their car, food on their table, buy their medicines or pay their utility bills,” Stefanowski said Thursday. “The governor’s election-year gimmicks aren’t cutting it.”
The top two Republicans in the state Senate, Minority Leader Kevin Kelly of Stratford and his deputy, Paul Formica of East Lyme, wrote in a joint statement that “the governor’s celebrations from under the Capitol dome are completely out of touch with reality for Connecticut’s working- and middle-class families. The governor is celebrating government being awash with cash meanwhile family budgets are broken.”
Senate and House Republicans proposed a $1.2 billion tax relief plan this spring that included an income tax rate cut for middle class households.
The governor countered that keeping the rainy day fund at its legal maximum and focusing on retiring debt was the best move to protect taxpayers.
“The rainy day fund is there in the face of a recession to make darn sure I don’t have to raise anybody’s taxes or slash spending,” Lamont said. “I think this is a buffer, it’s a cushion. It’s a smart thing to do for the people.”