State poised to make historic deposit to mitigate massive long-term pension debt
Question: When was the last time a Connecticut legislature was poised to adopt a state budget with a $2.3 billion surplus built into it?
Answer: Never, until now.
Democrats and Republicans alike voted for the $46.4 billion, two-year package when it went before the House of Representatives on Tuesday. But even though about 5% of the funds appears to be left unspent, the anticipated surplus will become a payment into the state’s pension accounts.
That’s because the budget, which boosts spending 2.6% in the fiscal year beginning July 1 and by 3.9% in 2022-23, really is the first of its kind under a new system designed to bring stability to state finances.
Connecticut is four years into a savings program that limits spending of income tax receipts tied to capital gains and other investment earnings, but this is the first time since 2017 that analysts are projecting big revenues from Wall Street before legislators actually approve a budget.
According to the legislature’s nonpartisan Office of Fiscal Analysis, the new budget has a built-in cushion of $1.24 billion in the first fiscal year and almost $1.1 billion in the second, with 75% to 80% of those surpluses tied to the “volatility adjustment” program that saves excess investment-related tax receipts.
But the state’s rainy day fund has filled up over the years and now holds more than $3 billion, its legal maximum of 15% of the General Fund. The volatility cap requires that any excess beyond that goes into Connecticut’s cash-starved pension funds for state employees and municipal teachers.
With nearly $92 billion in long-term, unfunded liabilities, including nearly $41 billion related to pensions, Connecticut is one of the most indebted states in the nation. Payments on pension, retirement health care and bonded debt consume nearly 30% of the General Fund and have been leaching resources away from education, health care, transportation, municipal aid and other priorities.
Connecticut historically has had huge budget surpluses whenever Wall Street enjoys a bull market. But governors and legislatures, Democrats and Republicans alike, have tended to spend those dollars, either on new programs or election-year tax relief.
Now, both parties are praising a system designed to attack the state’s legacy of debt, which involves pension obligations amassed over more than seven decades.
“We’re not awash in money,” said House Minority Leader Vincent J. Candelora, R-North Branford. “We’re still trying to pay the debts of our grandfathers.”
“The volatility cap is one of the best things we’ve ever done,” said Sen Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee. “We’re not spending … every penny we get. This budget is a testament to that.”
Major Wall Street credit rating agencies recently upgraded Connecticut’s bond rankings multiple times — moves likely to reduce borrowing costs for capital projects going forward.
The state expects to deposit more than $1 billion of this fiscal year’s surplus into its pension funds. Gov. Ned Lamont’s budget director, Melissa McCaw, has noted that this and other likely additional deposits over the next two fiscal years should drive down the regular required annual contributions to the pension funds, freeing up more dollars for core programs.
Osten praised Sen. John Fonfara, D-Hartford, co-chairman of the Finance, Revenue and Bonding Committee, who spearheaded the push to establish the volatility adjustment system.
“Progress is being made,” said Fonfara, who has repeatedly professed a goal of “changing the culture” at the Capitol and building stronger fiscal habits.