CT Hits Historic Fiscal Milestone With Extra Pension Payment

CONNECTICUT — Connecticut reached a positive historic fiscal milestone Thursday with the announcement that the state will direct around $61.6 million in excess money from the state’s rainy day fund to pay down pension obligations. State Treasurer Shawn Wooden will direct the money to the state’s employee retirement plan.

Under Connecticut law any amount in the state’s rainy day fund over 15 percent of the state’s general fund appropriation automatically must be used to pay down either the state employee pension obligations or the state’s teacher pension obligations. The law was passed in the historic 2018 bipartisan budget.

The same budget also established a volatility cap. The cap mandates that a portion of tax revenue from traditionally unstable sources like capital gains taxes go into the state’s budget reserve fund.

“To the credit of legislators in this building with the implementation of the volatility cap in 2018, strong investment returns for our taxpayers, we have begun to build our budget reserve fund over many years,” said Office of Policy and Management Secretary Melissa McCaw.

The rainy day fund’s balance is over $3 billion and is the highest it's been in state history. It’s among the top 10 states proportionately in the country.

Gov. Ned Lamont said the state is sending a signal that it’s serious about getting its debt obligations under control.

“It’s $60 million, and we have pension obligations going out in the tens of billions of dollars, but it’s directional and that’s really important for a state that has done nothing but kick the can down the road and borrow and expect the next governor, the next governor to pay for it,” Lamont said.

Connecticut still has one of the highest debt liabilities per capita in the nation, which is a problem that has been in the making. The state for decades through the 20th century operated on a pay-as-you-go model where pension payments for retirees were paid out of the state’s coffers instead of a dedicated fund; that meant Connecticut missed out of decades worth of compounding interest from investments.

Retirement benefits for newly-hired state employees are less generous than they are for those who are already retired.

“The bulk of the outstanding unfunded liability is associated with employees that are long gone,” Wooden said. “You start work in Connecticut today, your plan is very different from the plans that were in place that built up that significant unfunded liability.”

Standard and Poor’s credit rating agency upgraded Connecticut’s fiscal outlook to “positive for the first time in 18 years during 2019.

“This year we’ve had no less than three rating agencies in the midst of the pandemic hold our outlook as stable,” Wooden said. “These are all very significant accomplishments and very different form what’s happening in the rest of the country.”

The contribution to the pension plan will yield around $5 million in savings annually over 25 years, McCaw said. She said the contribution was a historic moment for the state.

“If we were to look back just over 10 years ago during the Great Recession, Connecticut had completely exhausted its budget reserve fund and the state had to borrow nearly $1 billion just to meet its operating expenses,” McCaw said.

Lamont credited his predecessor Gov. Dannel Malloy with making full annual required pension obligation payments every year he was in office.

Lamont reiterated Thursday that Connecticut’s finances in the short-term are in good shape thanks to the record rainy day fund, but the state will face some challenges balancing its budgets going forward, especially given the uncertain nature of the coronavirus pandemic.