Fiscal fix must include structural change

In a letter addressed to the people of Connecticut Monday, Gov. Ned Lamont laid down his markers for his first state budget.

“I believe our state is poised for success, with new jobs on the rise, unemployment rates at historic lows, and the growth of established and emerging sectors from wind energy to biotechnology on the horizon,” Lamont wrote. “I also believe that delivering on those opportunities requires a sustained commitment to fiscal stability that will allow Connecticut to turn the page on what’s been holding it back.”

The governor will present his 2020-2021 budget blueprint to the General Assembly on Feb. 20. If all he had to concern himself with was the present Connecticut economy, Lamont would be sitting pretty.

Unemployment is at 4 percent. Income tax from paychecks, the largest revenue source, increased significantly this year. A Jan. 25 report from the state Office of Fiscal Analysis calculates the improved economy will contribute $557 million more than budgeted in revenues from wages, sales tax receipts and businesses.

This year’s budget surplus could eclipse $500 million. If the surplus goes into the Rainy Day Fund, as Lamont advocates, Connecticut would have a healthy $2.3 billion budget reserve.

But despite the rosy economy, balancing the next bi-annual budget will be another arduous slog. The latest projection for the 2020-2021 budget forecasts a $1.5 billion deficit. The 20212022 projection is now $2 billion in the red.

How can a state enjoy a nearly $500 million surplus this year and be shackled with a $1.5 billion deficit the next? Fixed costs.

Connecticut’s payments on bonded debt and its annual contributions to pensions and other retirement programs consume about 30 percent of the budget’s General Fund. These fixed costs are where Connecticut’s fiscal fortunes turn from rosy to bleak.

Teacher pension obligations will increase $163 million next year. State employee pension costs increase $91 million. Debt service payments spike $213 million. Medicaid spending increases $124 million.

Connecticut’s unfunded pension liabilities are $87 billion. This mandates a $2.7 billion payment into the pension fund.

Fixed costs have bedeviled the budget process for a decade. As legislators struggle for solutions, tapping that Rainy Day Reserve will be a mighty temptation. Lamont warned that the reserve fund should not “lull us into a false sense of security and sap the urgency we need to confront our fiscal crisis head-on.

“I’ll suggest a path forward to finally address those fixed costs and reduce the rate of increase,” Lamont wrote. “I’ll also hold the line on the operating budget.”

Holding the line on operating costs will be a tall order. State employees will see contractual 3.5 percent pay increases in both 2020 and 2021. That will add $144 million each year. State union employees who were in place when the last concession deal was struck are also guaranteed layoff protection until June 2021 under the 2017 agreement with former Gov. Dannel P. Malloy.

The state employee unions are a formidable political bloc with influential friends among the Democratic majorities in the House and Senate. After contract concessions in 2009, 2011 and 2017, they are in no mood to go to the well one more time.

However, without structural changes in work rules, wages and health-care benefits of the active employees — coupled with restructuring of the onerous pension obligations — the state’s chronic fiscal crisis will remain unsolved.

One opportunity Lamont identified with expenses is to slash the $1.9 billion debt-financed capital improvements budget in half. The money is used to finance construction at municipal schools and state universities, or for municipal projects. It is a gutsy play for the new governor; one worthy of serious consideration.

Lamont knows the budget cannot be balanced with expense cuts alone. The state must develop new revenues.

The governor identified the sales tax as an opportunity. He will propose to broaden the products and services subject to the 6.35 percent tax.

Lamont will post his budget online and encouraged citizens to review and send reactions. He said he would travel the state to hear ideas and concerns.

“It’s my job to make sure that you understand the tenuous reality that we face, as well as the cost of doing nothing at such a critical juncture,” Lamont wrote.

Lamont earned justifiable praise from Democrats, Republicans, the labor and business communities for his outreach since inauguration. In a divisive time of tribal politics, Lamont has generated goodwill among diverse interests. He has done an admirable job of explaining his approach and expectations.

Now comes the difficult part. Lamont must deliver the thorny details of his pledge to introduce structural financial change.