Economist says state lags in funding retiree benefits, job growth

By Scott Benjamin

Gov. Ned Lamont says in his re-election campaign television commercials that he inherited a massive budget deficit and turned it into a $3 billion surplus.

CT News Junkie has reported that the state Office of Policy & Management, the governor’s budget arm, has reported that the state’s rainy-day fund will close out the fiscal year that ends in June with $5.46 billion, which will result in additional money being used to pay down the unfunded state employee and teacher pension liabilities.

That is a notable contrast to the March 1, 2018 report from the state Commission on Fiscal Stability & Economic Competitiveness, which stated that Connecticut’s economy contracted eight percent between 2008 and 2016.

However, economist Donald Klepper-Smith of DataCore Partners LLC, who has been in the field for more than 40 years, gives Lamont (D-Greenwich) a “‘D-plus’ “in economic management.

In particular, he pointed to the September 2021 Truth In Accounting Financial State of the States report that ranked Connecticut 50th among the 50 states in fiscal health, assigning an ‘F’ grade.

In a phone interview with Patch.com, Klepper-Smith, who served as chairman of Republican former Gov. M. Jodi Rell’s economic team, noted that the report state that, “Connecticut’s elected officials have repeatedly made financial decisions that left the state with a debt burden of $79.6 billion. That burden came to $62,500 for every state taxpayer. Connecticut’s financial problems stem mostly from unfunded retirement obligations that accumulated over the years. The state had only set aside 43 cents for every dollar of promised pension benefits and 5 cents for every dollar of promised retiree health care benefits.”

Patch.com contacted Lamont’s re-election campaign and sent via e-mail a summary of some of Klepper-Smith’s evaluations of Connecticut’s economy and provided an opportunity for the campaign to respond. Patch.com did not receive any statements from the Lamont campaign.

CT Mirror reported on March 31, that Lamont, who faces Republican Bob Stefanowski in the November 8 election, said, “Look, I’m not putting up the ‘mission accomplished’ banner, because as everybody knows, over the last 40 years or so, we accumulated an awful lot of debt. That was pension debt, health care debt and bonding debt. And while we’re beginning to bend the curve, as they would say in COVID days, we still have a way to go.”

Phoebe Holmes of Brookfield, who is Democratic nominee for the open seat in the 107th state House District, praised Lamont and Lt. Gov. Susan Bysiewicz (D-Middletown) for “leadership” that has produced budget “surpluses.”

She also lauded them for supporting a suspension of the state gasoline tax over the recent months in an effort to combat a national surge in inflation.

Klepper-Smith acknowledged that the Lamont administration has made payments over the last two years to reduce the unfunded liabilities. Those payments were partly related to the volatility cap provisions in the 2017 bipartisan budget agreement, which was signed by Democratic former Gov. Dannel Malloy of Essex– Lamont’s Immediate predecessor.

State Rep. Stephen Harding (R-107) of Brookfield said in a phone interview with Patch.com, “The question is that in 2023 and 2024, if we don’t have the surplus that we have now, are we going to continue to pay of this debt.”

That may be a challenge considering that Federal Reserve Board Chairman Jerome Powell has announced that there will likely be continued interest rate increases to combat the worst inflation in 41 years.

Said Klepper-Smith “There is every indication that we are in the midst of a recession,” considering that there have been two consecutive quarters of negative economic growth.

Apparently, a large part of the reason for the pension woes is neglect by governors and legislators over generations. CT Mirror budget reporter Keith Phaneuf told a Wilton League of Women Voters forum in April 2019 that 85 percent of the debt was due to structural under-funding of the state employee and public teachers’ pensions every year from 1939 through 2010.

Regarding the unfunded liabilities, former state Comptroller Bill Curry of Farmington, who was twice the Democratic nominee for governor, told Patch.com in January that, “I don’t want to pretend that this is a problem that should have been solved by now. It’s hard to make up a half century of inattention in a year or 10 years or even the next half century.”

Harding, who is running for the 30th District state Senate seat, remarked, “We haven’t seen the Legislature work collaboratively with any governor to tackle this issue.”

Klepper-Smith said that since Lamont took office in January 2019, Connecticut’s economy has ‘moved sideways,” noting that there are now 36,500 fewer jobs than when the governor took office while nationally all of the jobs lost during the pandemic have been recaptured. He added that Connecticut has only regained 80 percent of the jobs it has lost since the 2008 Great Recession.

He made similar criticism four and five years ago, while Malloy was still governor, that Connecticut – prior to the pandemic – was the only state in New England that had not recaptured all of the jobs that had been lost in the 2008 Great Recession.

“This is an economy that is coming back inch by inch as opposed to yard by yard,” Klepper commented on the progress since Lamont became governor in January 2019.

He said that, most notably, gross domestic product in Connecticut, according to the United States Bureau of Economic Analysis, declined .4 percent in the first quart er of 2022, while nationally it grew by 4.7 percent.

Klepper-Smith said there has not been a “complete review of economic development in other parts of the country. There has not been a review of what constitutes best practices.”

However, he commended Lamont for establishing a state Work Force Council, saying that those efforts are usually effective in, among other things, retraining people for new positions.

Klepper-Smith said that he has assisted the Eastern Connecticut Workforce Investment Board’s (EWIB), based in North Franklin.

Harding remarked, “I think the economy is better now than it was under Gov. Malloy. However, I don’t know how much of that is due to the Lamont’s policies.”

“The fiscal health of the state has a lot to do with the federal funds coming in and capital gains revenue from 2020, 2021 and into 2022 that were higher than expected,” added Harding.” I would argue that we will need probably one, two or three more years to determine the impact of his [Lamont’s economic] policies.”

In May 2021, the headline for a Wall Street Journal editorial praised the governor, reading, “Ned Lamont says no more taxes; A Democratic Governor stands up to his state’s never-enough caucus.”

Klepper-Smith said that Lamont has not addressed state employee labor costs that have placed an undue burden on taxpayers.

He said, “Connecticut taxpayers are being asked to provide, on average, wages and benefits that they will never see themselves. It underscores the lack of fiscal discipline. The rich wages and benefits for state workers, now 40% above their private sector counterparts, is one key reason why the State's business climate in consistently ranked in the bottom quintile, and that the long-term trend of net outmigration is likely to continue given demographic shifts and the emphasis on preserving the status quo, instead of maximizing economic growth.”

Harding said, “future hires in Connecticut should be considered for a defined contribution plan.”

Under Malloy in 2017, the state started using a hybrid benefits package for new hires, which was less expensive.

Lamont announced in 2019, his first year in office, that he would impose a debt diet on the state.

Has he followed through?

Said Harding, “In some respects he has. I don’t think there have been drastic changes, but there have been some changes.”

He commented, “I think that we need to be a more fiscally responsible state, which we’ve started to do over the last three or four years” as a result of, among other things, the 2017 bipartisan budget agreement.

Regarding the national economy, Klepper-Smith awards a ‘B-minus’ to Democratic President Joe Biden, indicating that factors such as the rise in global gas prices are largely out of his control.

However, he added that the $1.9 trillion American Rescue Plan stimulus approved in 2021 tossed a lot of money into the economy and has been a contributing factor in a supply and demand system that had led to the highest inflation in 41 years.

But Klepper-Smith also said there have been unusual developments.

“I don’t think that in the 40 years that I have been following it, that we’ve seen a business cycle like this,” he remarked. “The ripple effects from the pandemic have been profound.”

Resources:

https://ctnewsjunkie.com/2022/08/23/connecticut-starts-2023-with-surplus/

https://ctmirror.org/2022/04/0...

https://patch.com/connecticut/...

https://www.ctpost.com/business/article/Sweeping-CT-economic-plan-Cut-state-income-tax-12719929.php

https://ctmirror.org/2022/03/3...

https://www.wsj.com/articles/u...

Phone interview, Phoebe Holmes, Patch.com, August 31,2022

https://www.ctpost.com/news/article/Ken-Dixon-The-case-for-Dan-Malloy-13231441.php

Phone interview, Stephen Harding, Patch.com, August 23, 2022

https://www.wsj.com/articles/f...