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Connecticut’s Pension Debt and the Spending Cap

March 21, 2015
By Suzanne Bates

Suzanne Bates, Policy Director at the Yankee Institute examines Connecticut’s growing pension problem and how it could affect the state’s spending cap.

Connecticut’s pension debt is still growing, even though $1 out of every $10 the state spends goes into the pension funds for teachers and state employees. The debt increased by 7 percent from 2012 to 2014, up to $26.3 billion, despite the state pouring more money into the pension funds. Payments into these funds will have to keep increasing over the next 20 years as the state tries to get a handle on its pension debt. Unless the state’s economy starts to grow at a faster pace, this spending will either “crowd out” other state government spending, or lawmakers will want to keep raising taxes.

This year, just as predicted, lawmakers proposed increasing taxes by $2.4 billion, largely so they keep up with the growing cost of paying for state employee pay and benefits. But there is something standing in their way – the state’s constitutional spending cap.
The spending cap limits the growth in state spending to a percentage based on a five-year average of growth in personal income or last year’s inflation. What the spending cap does is protect taxpayers from runaway government growth in the years when it would hurt them the most.

But lawmakers don’t like the spending cap, as demonstrated by the numerous times they have voted to exceed the cap since it was enacted in 1992. But this year there will be no vote. It takes a 3/5 vote of the legislature to exceed the cap’s limits, and Democrats no longer have the super-majority that would be necessary to exceed the cap without Republican votes. Republicans say they will not vote to exceed the cap, so instead legislative leaders plan to “redefine” the cap by moving pension debt out from under it without asking for a vote.

There are several reasons this move could be considered illegal, as outlined by Peter Bowman in Yankee Institute’s recent policy brief, “Connecticut’s Spending Cap: A Legal Overview.” When lawmakers moved money out from under the cap in the past, they did it in tandem with a change to base year calculation. If pension debt doesn’t count in the new budget, it shouldn’t count in the old, for the purposes of calculating the budget growth allowed by the cap. Not so this time. By keeping the pension debt under the spending cap in the base year – fiscal year 2015 – then moving it only for fiscal year 2016, the fiscal note claims the budget is under the cap by $1.5 billion. But when the pension debt is removed from the base year, the budget is actually over the cap by about $280 million.

Moving payments to the state’s pension funds out from under the cap will make this cost to taxpayers less transparent. Cities and states across the nation are struggling to pay down their pension debt. Chicago’s credit rating was recently downgraded to ‘junk’ by Moody’s because of its unfunded pension liabilities.

Now is the time for lawmakers to reform benefits for state employees, so that the state can get a handle on its pension debt and get onto a more fiscally viable path. Making state employee pensions less transparent by moving them out from under the cap is a step in the wrong direction.