Connecticut bill would redirect $1 billion away from debt reduction

A version of this public comment was submitted to the Connecticut General Assembly’s Finance, Revenue, and Bonding Committee.

Governor’s Bill No. 1246 proposes changes that would weaken a key component of the structural fiscal safeguards that have served Connecticut so well. The bill alters the state’s general statutes by changing the “volatility cap” threshold, which determines the limit above which income tax revenue must be set aside in the Budget Reserve Fund (BRF). 

The BRF is a “rainy day fund” that allows Connecticut to prevent service cuts or the need to raise taxes due to revenue volatility—a concern for a state that relies heavily on capital gains taxes.  

The governor’s plan proposes increasing the cap by which funds flow into the BRF, which would reduce the state’s reserves and its ability to pay off long-term obligations. Lamont’s proposal would raise the cap from its current $3.9 billion to $4.4 billion in FY 2026 and reclassify an additional $300 million to bypass the limit entirely—redirecting nearly $1 billion that would go toward debt reduction to fund near-term political priorities. 

Many other bills were introduced that proposed even more drastic alterations to the fiscal guardrails. I speak today to remind you of the critical need to continue paying off your pension debt and to maintain your guardrails. 

I recently co-authored the report ‘The Case for CT’s Fiscal Guardrails’ in partnership with the Yankee Institute, which analyzed the effectiveness of Connecticut’s recent fiscal reforms, particularly in relation to pension debt reduction. 

Since the fiscal guardrails’ enactment in 2017, Connecticut has made substantial progress in stabilizing its finances. These policies have significantly improved budget predictability, reduced pension debt, and are expected to save taxpayers billions in interest costs. In 2016, the state employee pension fund was just 35% funded, and that plan is now 52% funded—the highest funded ratio achieved by the fund in nearly 20 years. According to your state comptroller, the anticipated pension payments have cumulatively freed up approximately $738 million in the budget annually to be used elsewhere. This is what enabled the state’s recent tax cut and could enable the servicing of your constituents’ needs. 

Connecticut’s progress has been recognized by major credit rating agencies, which had downgraded Connecticut before the guardrails, and all recently upgraded the state’s ratings due to the progress made through its policies. Connecticut’s credit rating is still at the low end among U.S. states, but this improvement has strengthened the state’s ability to borrow and finance developmental projects.  

Despite recent notable progress, Connecticut still faces the highest per capita pension debt in the nation, totaling approximately $40 billion—with an additional $20 billion in unfunded retiree healthcare benefits. This is the second-highest public employee debt burden in the country in per capita terms, equivalent to $16k per resident. 

Pension debt is Connecticut’s largest and most expensive debt. Unlike other budgetary obligations, unfunded pension liabilities grow rapidly if left unaddressed, compounding annually at approximately 6.9%. This is why careful consideration should be given to any policies that may affect the pace of debt elimination.  

According to the Reason Foundation and Yankee Institute paper, if Connecticut continues making additional contributions at the recent pace, both the state’s teacher and employee pension funds would reach full funding by 2038, nearly a decade ahead of schedule. This accelerated debt repayment would save the state an estimated $6.77 billion in interest costs over 30 years, adjusted for inflation. These are billions of dollars in interest savings that could be better used to address the critical needs of your constituents or prevent the need to increase taxes.  

There are many cases in which state and local governments have chosen to postpone addressing their pension obligations and faced severe consequences. The state of Illinois and the city of Chicago, for example, are cases among many others of governments that have been forced to make drastic cuts in departments—such as parks and recreation, infrastructure maintenance, education, and even public safety—to stay afloat. Until very recently, your state was at risk of facing a similar trade-off. Continued adherence to Connecticut’s current fiscal guardrails has helped to mitigate these risks. 

Further, procrastinating on pension contributions means that more contributions will be required overall, as the accumulated interest on the debt will compound for a longer period. Given the size of Connecticut’s remaining unfunded liabilities, any reduction in surplus pension contributions should be assessed not only in terms of immediate budget flexibility but also future budget flexibility.  

Slowing down the pace of debt repayment should be seen as slowing down the reclaiming of your state’s sovereignty. It would threaten your ability to serve your constituents or tackle crises, and further delay in funding would increase the costs of providing already promised benefits.  

The post Connecticut bill would redirect $1 billion away from debt reduction appeared first on Reason Foundation.

Source: https://reason.org/testimony/connecticut-bill-would-redirect-1-billion-away-from-debt-reduction/