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Report: State’s debt costs likely to grow faster than revenues

November 16, 2018

Despite a 12-month surge in state tax receipts, Gov. Dannel P. Malloy’s budget office warned Thursday that Connecticut’s pension obligations and other debt will grow faster than revenues in the coming years.

The administration’s Fiscal Accountability Report — a mandated annual assessment of a wide array of fiscal health indicators — also repeated its call for a long-term strategy to deal with teachers’ pension contributions, one of the fastest-growing segments of the state budget.

“Absent any recession, the (tax revenue) growth rates remain conservative and well below growth experienced in prior recoveries,” the Office of Policy and Management wrote in its report.

At first glance, this seems counter to recent evidence.

Connecticut boosted its budget reserves from 1.2 billion over the past fiscal year, driven largely by spiking state income tax receipts.

And initial projections show the state could deposit another 620 million next fiscal year, or roughly 8 percent. There will be similar growth for the next two years after that, as they jump 552 million, respectively.

Republican gubernatorial candidate Bob Stefanowski, who lost the 2018 campaign to Democrat Ned Lamont, repeatedly pledged to take a “zero-based” approach to state finances, making no assumptions about expenditures when preparing his own budget. That claim was highly contentious during the race largely because Connecticut carries a larger share of fixed costs on its budget than do most other states.

Perhaps the largest fixed cost involves the 2 billion in 2008 to shore up the teachers’ pension and pledged in its covenant with bond investors not to tamper with pension contributions until the bonds are paid off.

That isn’t scheduled to happen until 2032 and the earliest the state likely could pay off that debt is 2025.

“Failure to address the funding issues in TRS (Teachers Retirement System) leaves the state exposed to annual increases (in contributions) amounting to hundreds of millions of dollars each year throughout the coming decade,” the report states.

The governor has recommended that the state study an option raised earlier this year by the state Commission on Fiscal Stability and Economic Competitiveness.

It recommended that legislators consider dedicating an asset, such as the annual proceeds it receives from the quasi-public Connecticut Lottery Corporation, to a pension fund.

The lottery sent between 338 million into the budget’s General Fund in each of the past two fiscal years. If this stream were pledged to the teachers’ pension for a decade — and if reasonable growth is assumed from the investment of those revenues — it could be worth 5.5 billion to the pension fund over this period.

This would raise the teachers’ pensions’ funded ratio beyond 70 percent. In other words, it would — with the lottery revenue stream — have enough assets to cover more than 70 percent of its long-term obligations.

The bond covenant does allow the legislature and governor to modify pension contributions modestly, provided the funded ratio is in excess of 70 percent.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (www.ctmirror.org). Copyright 2018 © The Connecticut Mirror.

kphaneuf@ctmirror.org

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