By Kevin Mcnabola
Orange Board of Finance
Kevin McNabola
Moody’s Investor Services recently announced that state debt, pensions and other post-employment benefits liabilities all increased within the this past year in Illinois, Connecticut, New Jersey and Kentucky. However, there is some good news to report with respect to surging revenues in New Jersey and Connecticut, which now has over a $3.1 billion budgetary reserve. Connecticut has taken the right steps to manage its long-term financial obligations and prepare for the approaching economic storm that is sure to be rough based on the current economic policies of the Federal Reserve.
Connecticut’s budgetary reserve is attributed to a strong stock market and surging state income and business tax receipts, which contributed to Connecticut’s first credit rating upgrade in over two decades. The general obligation bond credit rating rose from A1 to Aa3. Due to the cap and size of our budgetary reserve, the state was able to pay down $1.6 billion of its long-term unfunded pension liabilities to help put the state on a more sustainable course.
However, it is worth mentioning that the economic policies of both the Federal Reserve and Treasury within the past 18 months have put Connecticut’s recent successes and financial sustainability at risk.
Based on the current economic headwinds facing Connecticut today with rising interest rates, inflation and wage pressures, the Fed should have taken steps to follow the economic policies of President John F. Kennedy, the first supply sider president. Kennedy implemented sweeping tax rate cuts across the board in 1962, leading to gross domestic product growth of 6.1 percent in year one and averaging 4.9 percent for the remainder of the 1960s.
President Ronald Reagan implemented similar policies in 1982, which included the free market principles of limited government, deregulation, lower taxes and a strong dollar. Reagan’s actions in 1982 led to tax cuts and long-term economic growth (4.4 percent growth from 1983-1990 and continued growth into the 1990s).
The current Fed policies have taken a strong economy without inflation and turned it into a high inflation bust in little more than a year. Federal policies on fossil fuels have driven gasoline, oil, natural gas and coal prices sky-high, not to mention food prices. Within the last year, Americans have seen an increase in taxes and the largest regulatory assault on business we have ever seen, with real wages for working class people falling steadily. Trillions of dollars in federal spending hit an economy that was already recovering strongly from the pandemic with a tight labor market. The Federal Reserve kept the money spigots open for too long, in part to finance the borrowing needed for all of the spending. Based on the Fed’s actions, one can easily argue that the current US inflation rate of 8.3 percent was predictable.
Connecticut’s fiscal health is stronger than it has been in decades. However, the Fed’s policies will lead to weakened stock market returns and state income along with business tax receipts that will plummet over the next year. These will ultimately lead to deficits and the inability to target additional funding to pay down long-term liabilities.
Connecticut still ranks within the top five states for long-term liabilities, due to many decades of financial mismanagement and rich defined benefit pension plans for state employees. However, Gov. Ned Lamont has done a lot to change that by working to put Connecticut on the path to fiscal sustainability. He addressed a $3.7 billion deficit that he inherited and made investments in paying down pension obligations with budgetary surplus.
The cost of serving pension debts will continue to weigh on states like Illinois, Connecticut and New Jersey in the near future. However, Connecticut has started the process of paying down its obligations and is better positioned than most states. The fact still remains that Connecticut’s greatest economic challenge in the near future will be competing with bad Fed policies which did not work in the 1970s and will not work today.
Kevin McNabola is the chief financial officer for the City of Meriden and a member of the Orange Board of Finance.