By Kevin McNabola
Orange Board of Finance
Kevin McNabola
For several decades going back all the way to 1939, the state of Connecticut has failed to adequately fund its pensions, and long-term debt has accumulated leading to billions of dollars being forfeited in potential investment earnings in the process.
However, within the last four budget years Gov. Ned Lamont, a fiscally conservative Democrat, has taken the necessary steps to “right the ship.” Connecticut is projecting another budgetary surplus of $1.9 billion for the fiscal year ending in 2023, which will be targeted to pay down additional pension debt, which currently stands at over $40 billion.
State revenue for the last fiscal year ended in the black, largely due to continued growth within Connecticut’s sales and use tax based on the high demand for goods and services on top of historically high inflation. Investment income was another key driver of growth within revenues driven by rising interest rates. This combination along with a strong stock market, increased tax revenues and fiscal discipline is finally putting Connecticut on a path to sustainability.
Over the course of the last four years, the state has paid down a total of $7.6 billion in pension debt. This means that the required annual pension contribution for the state should be $655 million less in the next two-year budget cycle. That money would otherwise have had to be budgeted and paid out by taxpayers, so it’s a rather significant cost avoidance for the state.
Connecticut still has a long way to go with paying down its long-term liabilities with pension, bonded debt and other post-employment benefits totaling just over $86 billion.
There are many on both sides of the aisle within the Connecticut legislature who do not agree on how the surpluses should be used. For example, some Democrats would like to continue to tax and spend down the annual surpluses and use the surpluses to fund the next year’s budget with additional program investment. On the other side, there are some Republicans within the legislature who feel that larger tax cuts should be implemented due to four straight years of budget surpluses.
It is important to understand that the gains that have been made should not be squandered away. Adhering to the state spending cap, which was established back in 2017, is important for future fiscal sustainability.
However, Democrats within the legislature do have a solid argument regarding the spending cap system, which doesn’t take into account what I call the “sins of the past.” These are surging prior pension costs, stemming from prior decades of inadequate funding, that have significantly impacted the level of funding taken away from key programs such as education, health care and transportation.
The reality is that prior governors and legislatures had the opportunity to address these significant long-term liabilities but kicked the can down the road. They should have at least started to address the debt burdens decades ago. The $6.5 billion Connecticut must contribute this fiscal year to retirement programs to make required payments on bonded debt accounts for nearly 30 percent of the entire general fund budget.
Connecticut has taken great strides in the past four years; however, we need to be disciplined and not go back to the old days. As a state, we owe it to our residents and taxpayers to develop a plan that continues across-the-board income tax reductions for the middle class and working class families. I would also advocate that we continue to fund the budgetary reserve in order to pay down additional debts, which in the end will go a long way in saving Connecticut billions of dollars.
Kevin McNabola is the chief financial officer for the city of Meriden and a member of the Orange Board of Finance.