State legislators could upend budget rules in 2023
In the five years since state officials legally tied their own hands when it comes to spending, Connecticut has amassed more than $3 billion in budget reserves and used nearly $6 billion in surplus to reduce pension debt.
Despite these successes, critics of the new savings system point to unpleasant side effects.
Republicans say this year’s tax cuts are too modest in the face of a 40-year high in inflation. State agencies handcuffed by a dwindling workforce are running up big overtime costs, and unions insist vital services are at risk.
Even one of the chief architects of the savings program put in place in 2017 wants to scale it back modestly to divert more funds for early childhood development.
And with the unconventional legal barriers shielding this savings program set to come down in June, the debate is heating up this autumn among candidates for state office.
Trying to reverse decades of fiscal mismanagement
Despite the great wealth of its residents, state government has massive liabilities in terms of its retirement benefit programs for public employees, as well as its bonded debt, but changes made during budget negotiations in 2017 put the state on more stable footing.
For decades, Connecticut rode a fiscal rollercoaster fueled by affluent Fairfield County and its robust financial services sector. When income tax receipts from capital gains and dividends were high, the state spent big. When times got tough, Connecticut borrowed, usually by shortchanging contributions to its pensions, and forfeiting — over 70 years between 1930 and 2010 — billions of dollars in potential investment earnings.
The state began fully funding its pension programs 12 years ago under then-Gov. Dannel P. Malloy but struggled with one budget deficit after another as the state’s economy struggled to rebound from the Great Recession of 20072009.
When yet another fiscal crisis paralyzed the 2017 legislature, lawmakers from both parties compromised to end a nine-month-long struggle to adopt a new budget.
There would be new caps on spending and borrowing. But the linchpin was the “volatility adjustment,” a provision that forced officials to ignore a portion of tax receipts tied to investment earnings and quarterly business filings.
Simply put, when these revenues pour in above expectations, the funds have to be saved, not spent. And when the budget reserve was filled, the funds had to be used to pay down pension debt.
And to make sure no one tampered with these spending controls, legislators agreed to guarantee them contractually. The state borrows billions of dollars annually for capital projects by issuing bonds on Wall Street. Starting in 2018, it pledged in the bond covenants — essentially the state’s contracts with its investors — not to adjust the spending controls, except under very limited conditions, for five years.
Ironically, almost immediately after the new savings program was created, financial markets began to surge, and the tax receipts began pouring in.
These reforms “are, in large part, the reason why we have the strength in the state’s budget,” said Senate Minority Leader Kevin Kelly, R-Stratford. “They’re working well.”
The rainy day fund, which stood at $212 million or just 1% of annual operating costs in 2017, now tops $3.3 billion, or 15% of the General Fund — the legal maximum.
The $5.8 billion in supplemental pension payments made since 2020 were in addition to the roughly $3 billion Connecticut is required to contribute annually to these benefit programs.
Pension debt isn’t Connecticut’s only problem
But the so-called “bondlock” provisions expire in June 2023, and some say there are legitimate arguments to change this system.
The billions saved and used to reduce pension debt are still modest when set against the roughly $95 billion in long-term unfunded obligations Connecticut has amassed, counting pensions, retiree health care and bonded debt. Actuaries project that will remain a major component of the state’s budget into the 2040s.
In other words, even five years of unprecedented saving can’t reverse a problem amassed over seven decades.
“I hope that enough people will keep their eye on the ball,” said Sen. John Fonfara, D-Hartford, co-chairman of the Finance, Revenue and Bonding Committee. “We have a long way to go in terms of our unfunded liabilities.”
And many legislators also concede the past five years were far from the norm and can’t be expected to continue indefinitely. As evidence, they point simply to the decade of meager revenue growth Connecticut faced just before 2018.
In addition, pension debt isn’t Connecticut’s only problem.
The state is home to some of the most extreme income and wealth disparities in the nation. The coronavirus pandemic only exacerbated Connecticut’s wide gaps in access to education, health care, affordable housing and economic opportunity.
“Maintaining the status quo doesn’t advance exponential change,” said Emily Byrne, executive director of Connecticut Voices for Children, a New Haven-based policy think-tank.
Byrne said the bond lock helped create an important culture of fiscal responsibility and planning, but Connecticut has other pressing problems that deserve immediate attention.
Senate President Pro Tem Martin M. Looney, D-New Haven, agrees.
The new spending cap created in 2018 imposed several new challenges, and some still must be resolved.
State aid to poor cities and towns, which was exempt under an earlier cap system begun in the 1990s, now is subject to the spending limit. Between 2023 and 2027, the state’s hefty, required pension contributions will come under the cap — potentially squeezing out other items.
That’s not scary right away because Connecticut received $3 billion in spending-cap-exempt federal COVID relief aid last year. Much of that funding still is available now, but it will be gone by 2025.
What happens if federal aid expires, as the spending cap gets tighter? And if the national economy slides into recession next year and that downturn lingers, could all of these variables turn bad at the same time?
“I do worry about that,” Looney said, adding he favors restoring the spending cap exception for state aid to poor cities and towns — which would be possible after the bond-lock provision expires next June.
The effect of fewer state employees
When more than 4,000 veteran state employees retired between January and June, Lamont held a press conference and said the “silver tsunami” wasn’t as bad as many feared it would be and that the state government was still well-positioned to serve its residents. Not everyone agreed. The retirement surge over six months was double what the state normally sees in a year. Also, between 2011 and 2018, Malloy had reduced the Executive Branch workforce by almost 10%.
Nonpartisan analysts say state agency overtime spending last fiscal year hit $266 million, 11% higher than the previous year.
A coalition that includes state employee unions posted a strong counter-statement to the governor on its website.
“The exodus has only exacerbated the destruction of the vital state services that all working people across Connecticut depend on, in particular Black and brown, women and immigrant workers,” wrote union leaders, who insist Connecticut must dedicate more budget funds to fill vacant posts.
Even Fonfara, one of the chief architects of the new savings program, has proposed modifying it somewhat.
Fonfara didn’t recommend changes to the volatility adjustment. But, in the spring, he did try to redefine a second, smaller savings program also launched in 2017 that’s become known as the “revenue cap.” Designed to stop legislators from creating budgets with no room for error, the revenue cap limited appropriations last fiscal year to 99% of projected revenues this fiscal year. That’s a built-in cushion of $275 million.
Fonfara said it was unnecessary, given that the volatility adjustment already forced the state last budget cycle to save more than $3 billion in other tax receipts — and has never saved less than $530 million in any single year.
The Hartford lawmaker wanted to redirect funds from that smaller savings program — starting in 2024 after the bond-lock provisions expire — for an early childhood development and child care system that he says the pandemic has left on the verge of collapse.
Lamont, who blocked Fonfara’s efforts, has dedicated temporary federal COVID aid to bolster child development. But advocates say more is needed.
According to the Connecticut Association for Human Services, only 11% of Connecticut’s parents can pay for early child care and development without sacrificing basic household necessities, and many sections of the state are “child care deserts” with no program slots available.The Lamont administration declined to weigh in when asked whether the Democratic governor, if re-elected this November, would support revisions to volatility adjustment or other budgetary controls.
“We are in the preliminary stages of developing a biennial budget proposal that the governor will announce … in February,” Lamont spokesman Chris Collibee said.
Budget restraints might have to be modified to cut taxes
But Democrats aren’t the only ones focused on the huge savings the state has amassed over the past five years.
Though Republicans haven’t held a majority in the Senate since 1996, the chamber was deadlocked 18-18 in 2017, when the bipartisan state budget that included many fiscal reforms was approved.
GOP lawmakers say it was their insistence on including them as a condition for any bipartisan deal that made the difference.
Both Kelly and House Republican Leader Vincent J. Candelora of North Branford said they’re fearful Democratic legislators, if they again win a majority in November, will try to weaken savings efforts and open the door for more spending in 2023.
The bigger problem, GOP leaders say, is getting more tax relief to low- and middle-income households reeling from a national inflation rate that has hit 9% this year.
The answer might lie, they add, with the extra funds deposited into the pension system.
State analysts project that supplemental pension payments made in 2022 alone could reduce required contributions in future years by more than $300 million annually.
When the state runs up huge budget surpluses and uses that windfall to pay down debt and ease pressure on the state’s budget, a portion of that savings should find its way to Connecticut households, Candelora said.
And while he didn’t propose a specific amount or a specific type of tax cut, the House GOP leader added there’s no reason a portion of the $300 million savings in the pension line item couldn’t be returned to taxpayers.
“When you continue to crow about paying all of this debt down and the residents don’t feel it,” Candelora said, “government is only working for itself and not for the people.”
Kelly added that “Republicans insisted on these [spending controls] in the bipartisan budget to bring relief to taxpayers. It shouldn’t just all windfall to the government.”
At least one Republican says the state must find a way to get more tax relief to residents, even if it means saving less during boom times.
Republican gubernatorial candidate Bob Stefanowski unveiled a $2 billion tax relief plan last week that included recurring tax cuts worth roughly $700 million per year.
Stefanowski conceded that Connecticut might not be able to save quite as aggressively as it has over the past five years, but conditions for too many households have gotten worse.
“Our view,” he added, “is people are struggling right now.”