Connecticut could spare its children from having to pay nearly $7 billion in pension debt penalties by adhering to — and possibly accelerating — a controversial savings program that’s come increasingly under fire at the Capitol, according to a new analysis from the Yankee Institute for Public Policy.
“The Case for CT’s Fiscal Guardrails,” co-authored by the libertarian Reason Foundation, argues that tens of billions of dollars in pension debt — a problem created over seven decades — could be erased by 2038 if all the economic variables break Connecticut’s way.
And while it’s more likely, the two groups say, that paying off this legacy debt could stretch into the 2050s, intensifying savings efforts still could shave billions of extra dollars and several years off that debt schedule.
But critics of the seven-year-old budget controls that supporters call “fiscal guardrails” say it already has severely weakened education, health care, social services and other core functions of state government. Asking one generation to try even harder to solve a problem created by three, they say, would push some programs close to collapse.
“It’s our position that the guardrails are serving the people of Connecticut well, and it would be a mistake to do anything to alter them,” said Carol Platt Liebau, president of the Hartford-based Yankee Institute.
Since 2017, legislatures have dedicated $7.7 billion in budget surpluses to cover unfunded pension obligations and are depositing another $854 million from last fiscal year’s surplus this fall.
That’s an average of $1.41 billion in surplus annually going into the pensions since late 2017, on top of the more than $3 billion in required contributions Connecticut makes yearly to support these programs for state employees and municipal teachers.
The state still has a long way to go, having entered this year with $37 billion in unfunded obligations, a massive problem created by inadequate savings by governors and legislatures between 1939 and 2010, according to a 2015 study from the Center for Retirement Research at Boston College. Pension fund analysts project it won’t be until the early 2050s when this legacy of debt will be fully extinguished.
But just as Connecticut effectively forfeited billions of dollars in potential investment earnings by not saving properly for pensions across 71 years, setting aside more money now gives the state treasurer more to invest — and the potential to solve the problem faster.
Gov. Ned Lamont’s administration says required annual pension contributions, which were about $80 million higher in the current fiscal year than in 2023-24, would have been about $730 million greater had it not been for all the supplemental contributions Connecticut has made in recent years using surplus. And that $650 million per year savings will grow even more once this fall’s surplus transfer to pension funds is complete.
The Yankee-Reason Foundation analysis says the problem could be solved by 2038 if state officials could:
Boost the annual surplus transfer to $1.8 billion, a jump of 28%;
Maintain that for another 14 years;
And have the good fortune not to face another economic recession during that period.
But they also concede that last condition is unlikely.
According to the National Bureau of Economic Research, the longest gap between recessions since 1854 — the farthest back its research goes — was the 10-year and eight-month stretch between the end of the Great Recession in June 2009 and the start of the coronavirus pandemic-induced plunge in February 2020.
Mariana F. Trujillo, a policy analyst with the Reason Foundation’s Pension Integrity Project, noted that Connecticut, historically, has failed to make market average returns on pension fund investments. [The state has scored high returns over the past two fiscal years under new state Treasurer Erick Russell.]
Regardless, the potential to accelerate the elimination of this debt and to spare Connecticut’s children the burden by growing the pensions funds and their investment-earning potential now is very real, said Leonard Gilroy, senior managing director of the Pension Integrity Project. [The report includes an interactive web page that allows viewers to see the impacts of increased pension fund investments on long-term debt.]
“The reality of the math and pensions is non-negotiable,” he said. And given that Connecticut has one of the five worst-funded pension systems in the nation, officials here should be focused on one question, he added. “How much is it going to cost taxpayers to deliver this [pension] promise over the next 30 years?”
But the call to scale back pension savings efforts has been growing at the Capitol as majority Democratic legislators and program advocates say the state already is siphoning too many dollars away from core services and into pensions.
Since the rainy day fund hit its legal maximum four years ago, 21% of all revenue — excluding those assigned to special budget funds — has gone into the pensions, on average. That’s nearly double the pace Connecticut contributed to pensions under Lamont’s predecessor, Gov. Dannel P. Malloy, who served from 2011 through 2018 and ensured the state always contributed the full required amount.
The primary tool used to accumulate savings is the “volatility adjustment,” a mechanism that bars legislators from spending a portion of quarterly income and business tax receipts that tend to fluctuate significantly year after year. In other words, it was expected to generate large savings some years and little or no savings in others.
Instead, it has captured an average of $1.4 billion in each of its first seven years.
That effectively removed 6% of all General Fund revenues from possible use in the budget. And state analysts say it will keep grabbing between $800 million and $1.2 billion annually through 2028.
Critics say this system is seizing hundreds of millions of dollars in reliable revenues that it falsely characterizes as “volatile” at the same time it is targeting less stable funds.
Meanwhile, legislators and interest groups say many core programs are in crisis.
Medicaid rates for doctors who treat the poor haven’t been adjusted in any broad-based fashion since 2008, leaving health care advocates worried that thousands of poor residents can’t find physicians willing to treat them.
Community college tuition this fall is up 11% from two years ago, while tuition and fees at regional universities will be up 7% from 2022.
Nonprofit agencies that deliver the bulk of state-sponsored social services to people with disabilities or to patients struggling with mental illness or addiction say they lose more than $450 million annually due to state payments not keeping pace with inflation since 2007.
And Education Cost Sharing grants — the state’s chief form of aid to local school districts — are up 12% without adjusting for inflation since 2017 but down 18% once that factor has been applied.
Democratic legislative leaders have said Connecticut could save somewhat less aggressively, strengthen these and other programs, and still pay down pension debt faster than it did last decade.
Labor unions and other progressives say core programs will be decimated well before the late 2030s unless the state slows down its saving efforts.
The State Employees Bargaining Agent Coalition, which represents nearly all bargaining units in state government, wrote in a statement that officials are using these budget controls to siphon dollars out of core programs, rather than from large corporations and wealthy households, to pay pension debt down faster.
“When the interests of the ultra-wealthy and corporations are lifted above the average Connecticut resident, the result is an upside-down tax structure and underfunded and understaffed public infrastructures,” said Travis Woodward, a member of SEBAC’s governing board and president of the union that represents engineers, planners and information-technology specialists. “As they stand now, the fiscal roadblocks are a set of detrimental policies that are barricading our way to progress on economic and racial justice.”
Leslie Blatteau, a vice president with AFT Connecticut, said that to suggest reserving even more funds for pension debt, the Yankee Institute plan is “rooted in a purposeful blindness to the struggles of our communities.” Blatteau also serves on the steering committee of Connecticut For All, a progressive coalition of more than 60 faith, labor and civic organizations.
But the Yankee Institute’s Liebau countered that “it’s important to have compassion for all of the people who are suffering as a part of the poor [fiscal] decisions that were made” by past legislatures, but that sympathy also extends to taxpayers.
Liebau also noted that as government has run up huge budget surpluses, state employee unions have been able to negotiate healthy raises. This is the fourth consecutive fiscal year that most workers receive 2.5% general wage hike and a step increase. A step typically adds another 2 percentage points to overall raise.
“I would put out that it’s also a matter of priorities,” Liebau said, adding that Lamont and legislators also could try to dedicate less to raises and more to other programs.
Minority Republicans in the House and Senate have been opposed major changes to the budget controls, though they did suggest earlier this summer redirecting surplus funds for a new purpose: a modest reduction in state electric rates.
And while House GOP Leader Vincent J. Candelora of North Branford said he doubts legislators from either party want to save even more aggressively — as the Yankee-Reason Foundation report suggests — he praised both groups for reminding officials of the huge pension debt problem that is far from resolved and the success the budget controls have had to date.
“People forget about it, and they’re willing to give up on it,” he said. But “we should never budget volatile income.”