Connecticut paid down pension debt faster than the rest of the nation in 2022 and continues to outpace most states, analysts from a nationally recognized public policy group told lawmakers Tuesday.
But while legislators believed the engine driving those debt payments was a program that saved only temporary surges in income and business tax receipts — unlikely to continue year after year — it also siphoned off huge sums of stable revenues normally earmarked for education, health care and other core programs.
“The difference can accumulate over time, and you can have this sort of growing gap,” Mark Robyn, a senior analyst with The Pew Charitable Trusts, told members of the General Assembly’s Finance, Revenue and Bonding Committee. “And indeed, that seems to be what we’ve seen since 2018.”
Robyn was referring to what’s known as the “volatility adjustment,” one of several state budget caps legislators enacted in 2017 to help end a string of deficits and help bolster state reserves.
Lawmakers decided to bar themselves from spending a portion of income and business tax receipts — particularly those tied to capital gains and other investment earnings — on grounds that these revenues could fluctuate greatly.
Controlling “volatile” revenues is a sound practice that 19 other states besides Connecticut follow, said Josh Goodman, another senior analyst. Otherwise, programs could grow one year and be canceled the next. Staff could be laid off shortly after being hired.
But current lawmakers say their 2017 counterparts defined “volatile” too conservatively. Since then, an unprecedented $12.5 billion in surpluses, about $1.8 billion per year, has been generated — a cushion Pew analysts say represents about 9% of the General Fund.
Those surpluses have elevated a meager $212 million rainy day fund to a record-setting $4.1 billion while leaving another $8.6 billion to be deposited into Connecticut’s pension systems for state employees and for municipal teachers.
“Connecticut is actually contributing more by certain measures to its pension system annually than any other state,” Goodman said. Connecticut’s pension contributions as a share of employee payroll ranked first nationally in 2022, and the state also dedicated big chunks of surplus in 2023 and 2024 — $1.3 billion two years ago and more than $930 million last year, according to the comptroller’s office.
Pew analysts noted that Connecticut still carries more pension debt per capita than nearly all other states. The state entered this fiscal year with $79 billion in long-term debt, including $35 billion in unfunded pension obligations, $17 billion owed to retiree health care programs, and most of the rest involving bonded debt for capital projects.
Connecticut amassed its pension debt across seven decades of improper savings, ranging from 1939 through 2010, according to a 2015 study by the Center for Retirement Research at Boston College. And even given the billions in surplus dollars added to pensions in recent years, analysts project the state will be paying off unfunded obligations well into the 2040s.
In other words, that problem can’t be solved quickly, even by huge budget surpluses generated since 2017.
Meanwhile, many members of the General Assembly’s Democratic majority now say that aggressive forced savings approach has taken a toll on education, health care, social services and town aid. Those programs, they say, can’t survive until the late 2040s on the lean funding they’ve been receiving.
Gov. Ned Lamont, a fiscally moderate Democrat, had opposed any adjustments to savings programs until earlier this month. In his budget proposal for the next two fiscal years, the governor suggested reclassifying about $300 million in each of the next two fiscal years from “volatile” to safe-to-spend.
Progressives argue this is too little, pointing to Medicaid rates that haven’t been adjusted in nearly two decades, sharply rising tuition and fees at public colleges and universities, and municipal grants and funding for social service programs that have lost hundreds of millions of dollars in purchasing power to inflation.
“It’s an economic question with a clearly discernible answer: Our current system is not balanced nor responsive, and it’s preventing our legislature from making proactive structural changes that will safeguard our economy and communities against future risks and unknowns,” said Norma Martinez HoSang, director of Connecticut For All, a progressive coalition of more than 60 civic, faith and labor organizations.
The Pew Charitable Trusts is a nonpartisan organization, and neither Robyn nor Goodman endorsed any specific reforms for Connecticut’s budget caps.
Connecticut legislators defined “volatile” revenues in late 2017 largely by counting how much in quarterly income and business tax receipts had been received in the prior fiscal year. Even revenues above that threshold could not be spent, though the limit is adjusted annually to reflect growth in personal income.
Pew analysts noted Connecticut could change that system to reflect a rolling average of tax receipts over several years.
Depending on the type of change proposed, though, legislators might have to wait until mid-2028, even if they are disposed to act now.
That’s because state officials pledged in bond covenants — essentially contracts with investors who purchase state bonds to finance capital projects — only to make limited changes to these budget caps until then.
State Treasurer Erick Russell has said he believes the state can make some reforms to savings rules now that would allow for more investment in programs while still shrinking debt, albeit at a slower pace.
Russell told the finance panel on Tuesday the key is maintaining a commitment to sound fiscal principles.
Pledging to investors to follow these budget rules “really sent a signal to the market about the state’s commitment to prioritizing fiscal health,” he said. “They have seen that Connecticut is committed to this work.”
Rep. Maria Horn, D-Salisbury, co-chairwoman of the finance committee, noted afterward that no legislator, even those most critical of the extent of savings, has proposed repealing the system entirely.
Horn, who has said she is willing to consider reforms to the budget caps, said Pew analysts offered valuable perspective. And while 2017 legislators were successful at ending deficits, building reserves and reducing pension debt, few anticipated that Connecticut would save 9% of its General Fund each year.
“Clearly, if we were estimating what truly ‘volatile’ revenue was, we got it wrong,” Horn said.
But the committee’s other co-chair, Sen. John Fonfara, D-Hartford, and Sen. Ryan Fazio of Greenwich, ranking Senate Republican on the panel, warned their colleagues to be cautious when considering changes to the system.
Connecticut entered what many economists called the Great Recession in 2008 with a then-record $1.4 billion in its rainy day fund.
By June 2009 legislators had assigned the entire reserve to plug projected gaps in 2010 and 2011, ordered a nearly $875 million tax hike and ran up nearly $1 billion in operating debt.
And despite all that, Gov. Dannel P. Malloy inherited an 18% projected budget deficit when he took office in January 2011. He and lawmakers approved a tax hike estimated at more than $1.8 billion a year while securing concessions from state employee unions.
“It will go fast, faster than what we can imagine,” Fonfara said of the current rainy day fund when the next recession hits. “And when it’s gone, the knife comes out.”
Lamont projects required pension contributions will increase by $15 million next fiscal year. But without all the surplus funds added to these retirement programs in recent years, the cost would be closer to $740 million.
“Without those budgetary guardrails,” Fazio said, “that reality would have been worse.”