Public sector pensions are prime beneficiary of federal COVID relief grants

Governor Ned Lamont delivers his budget address to the general assembly at the Capitol in Hartford, Conn. on Wednesday, February 20, 2019.

Governor Ned Lamont delivers his budget address to the general assembly at the Capitol in Hartford, Conn. on Wednesday, February 20, 2019.

Brian A. Pounds / Hearst Connecticut Media

The coronavirus left unprecedented damage in its wake. Massive unemployment, education interrupted for hundreds of thousands of students, and a safety net pushed beyond its limit — not to mention more than 8,000 lives lost — sparked countless appeals for government assistance to rebuild a struggling state.

Yet an analysis by the CT Mirror shows that more than six out of every 10 federal relief dollars built into the new state budget that began July 1 effectively will wind up in public-sector pension accounts.

And while Gov. Ned Lamont and others insist the new state budget — and the billions Congress sent to Connecticut via the American Rescue Plan Act — will be used to heal the state’s wounds, others question whether the administration’s priorities are askew. Pension debt deserves to be addressed after being ignored for decades, they say, but that shouldn’t come at the expense of the state’s response to a once-in-a-century health and economic crisis.

“What goes into that budget reflects your true intention,” said Sen. John Fonfara, D-Hartford, who fought unsuccessfully for the legislature to impose major income tax hikes on the wealthy to fund a more aggressive response to COVID. “It’s not about the policy of what we’ve done, it’s about the policy of what we haven’t done.”

Analysts project the newly adopted $46.4 billion, two-year state budget will close in July 2023 with $2.3 billion left over — an amount that exceeds the $1.8 billion in federal coronavirus relief built into the budget. Because the state’s rainy day fund already is filled to the legal maximum, those dollars must go into either the pension fund for state employees or the retirement system for teachers.

And that’s in addition to the nearly $6 billion in required pension deposits Connecticut already plans to make as part of the two-year budget. That’s a supplemental payment of more than 35 percent.

“For more than a generation as a state we have been tolerating the intolerable — an economy working only for the privileged few, plagued by systemic racism, hobbled by inequality,” a coalition of state employee unions said in a statement last week. “The ARP funds are an opportunity to turn our state around and build a better future for all working families, black, brown and white. They should not be used for any other purpose.”

Fonfara said the new state budget failed to do enough for poor urban communities where minority families suffer from decades of unequal access to education, health care, affordable housing and economic opportunity — problems all compounded by the pandemic.

The Hartford lawmaker called the budget “a knee on the neck of the Black community” when the plan was debated June 9 on the Senate floor.

Lamont, who blocked Fonfara’s proposed tax hikes, objected strongly to the senator’s reference to the 2020 murder of George Floyd by Minneapolis police, and insisted the new state spending plan will meet many needs.

“I think this is an incredibly important, transformative budget,” he said at the time. “I think it makes a big difference in people’s lives, especially the lives of people hardest hit by the pandemic, especially in the lives of Black and brown people, the likes of which hasn’t been done for 30 years.”

Melissa McCaw, Lamont’s budget director, said Connecticut must be careful not to over-extend itself. State finances were on a fiscal rollercoaster for much of the 1990s and 2000s as lawmakers dramatically increased spending when tax receipts from Wall Street were robust, only to slash programs and raise taxes when the markets plunged.

Nearly $2 B in new federal aid built directly into the state budget

Despite these concerns about priorities, the new state spending plan and other federal pandemic relief spent outside that plan will support major new investments in several areas.

Communities will get about $240 million extra in general government grants and another $140 million in Education Cost Sharing payments to local school districts.

Nursing homes averted a major caregivers’ strike this spring thanks to the new budget. Faciltities get a temporary, 10 percent increase in Medicaid rates starting in July and running through March. That’s in addition to the ongoing 4.5 percent and 6.2 percent increases also scheduled for this fiscal year and next, respectively.

About $280 million extra over two years will go to the private, nonprofit agencies that deliver the bulk of state-sponsored social services in Connecticut.

The state will deposit $150 million into the unemployment trust, which will have amassed close to $1 billion in debt — almost entirely due to the pandemic — by the calendar year’s end. Businesses are assessed to cover that debt, so the state’s payment effectively amounts to tax relief.

There will be new subsidies for child care services. Tourism promotion is enhanced.

All totaled the new budget increases spending $1.5 billion over the biennium. But these aren’t the only resources that will available to help Connecticut recover from the coronavirus pandemic.

The American Rescue Plan Act ordered about $6 billion in aid for governmental entities here, including:

$3.2 billion went directly to state government;

$1.6 billion directly sent to cities and towns;

$1 billion for local school districts;

And several smaller pots of money for capital projects and regional entities.Lamont and the legislature built almost $1.8 billion of ARPA funds directly into the new state budget, and have begun plans to spend the rest on other needs created by the pandemic.

And when it comes to the huge $2.3 billion surplus projected for the new two-year budget, it would not have been easy, legally or politically, to use those dollars for anything other than pension debt.

Most of that potential fiscal cushion involves state income tax receipts tied largely to capital gains and other investment earnings. Since 2017, the state has tied its own hands, restricting its ability to spend these wildly fluctuating revenues, unless 60 percent of the House and Senate agree.

This “volatility cap” system is the main reason Connecticut has amassed more than a $3.1 billion rainy day fund — hitting the legal maximum of 15 percent of annual General Fund expenditures. It’s also why about $1.2 billion left over from the 2020-21 fiscal year, which ended last week, also will head into the pensions.

Connecticut has some of the worst-funded retirement benefit programs in the nation, having failed to save properly for these benefits for more than 70 years. And Fonfara spearheaded the effort to create this savings mechanism.

Hughes: ’We’re putting the pension funds before the workforce crisis’

Still, he and others say before the state makes billions of dollars in supplemental pension payments, it needs to be certain its response to all communities battered by the pandemic is sufficient.

Rep. Anne Hughes, D-Easton, said Connecticut families are reeling from a “catastrophic work stoppage,” referring to the 292,000 jobs the Department of Labor says Connecticut lost in March and April of 2020. The state still hasn’t regained about 107,000 of those jobs.

“It’s absolutely unconscionable the whole way we worked through this budget process,” added Hughes, who co-chairs the House Progressive Democratic Caucus. “We’re putting the pension funds before the workforce crisis and that is not OK.”

Liberal Democrats, labor and other groups argued this past spring for much more spending in health and child care, social services, job training and municipal aid — particularly in Connecticut’s poor urban centers where the coronavirus hit hardest.

Republicans also pushed hard for more relief for struggling businesses and the unemployed. And while Congress technically prohibited rescue grants from being used for tax cuts, there were other options to provide more economic relief that Connecticut didn’t pursue.

Still, both the Democratic majorities in the House and Senate, as well as Republicans in both chambers, supported the new budget in large numbers.

And while leaders from both parties acknowledged investing in pensions isn’t the best way to revive Connecticut’s economy or assist families in pain, it wasn’t a bad investment.

“We are at a point where we have options” to substantially improve the pension funds, said Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee. “We have not had options in a long time.”

Connecticut entered the fiscal year with nearly $41 billion in long-term pension debt, a crippling problem amassed over more than 80 years and projected to remain a thorn in the state’s budget into the late 2040s or early 2050s.

Putting an extra $1.2 billion into the pensions now and potentially another $2.3 billion in two years from now won’t whittle the overall debt down that much. But the annual payments on the pension, which already consume an abnormally large share of the budget, could drop by as much as $200 million by the mid-2020s, Osten said, freeing up resources for other priorities.

Political differences stopped CT from doing more with federal aid

Still, the Sprague lawmaker also conceded Democrats wish they could have done more with the new state budget.

Matthew Barrett, president and CEO of the state’s largest nursing home coalition, said “a tremendous public good was accomplished” with the investments in nursing homes.

But Barrett, who heads the Connecticut Association of Health Care Facilities, added that budget was “a bridge to the other side of the pandemic,” and not a solution to the longstanding occupancy and Medicaid funding issues that are costing the industry here $135 million per year.

That crisis still must be addressed in the coming years to ensure proper elderly care continues in Connecticut, he said.

Gian-Carl Casa, president of the CT Community Nonprofit Alliance, said his group similarly is grateful for the increased aid the budget provides. But it falls far short of the additional $460 million needed annually from the state to reverse nearly two decades of stagnant government funding to social services.

Many progressive Democratic legislators and their allies in labor and faith communities pushed hard this year for state tax hikes on wealthy households and large corporations as a way to ensure that more aggressive new investments could be made, first with federal money and then with enhanced state tax collections once the American Rescue Plan dollars expire.

But Republicans and fiscally moderate and conservative Democrats, led by Lamont, fought hard to block these and other major tax hikes in the new state budget. The governor said this was key to helping Connecticut’s economy get off the ground.

House Minority Leader Vincent J. Candelora, R-North Branford, said Connecticut missed a chance to do more.

Candelora, who voted for the budget, said the state could have deposited far more than $150 million into the unemployment trust — thereby sparing businesses enormous increased assessments in the coming years.

Connecticut lost a staggering 292,000 jobs during March and April 2020, and has regained 185,000 since, said Department of Labor economist Patrick Flaherty, who projects it will take until mid-2022 or slightly longer to get them all back.

But even if that happens — which other economists doubt — Connecticut still would be 20,000 to 30,000 jobs shy of employment levels from mid-2007, just before The Great Recession.

The Connecticut Business and Industry Association argued frequently that sparing businesses from the Herculean task of rebuilding the unemployment insurance trust is the best way to spur new job growth.

Republicans also were disappointed, Candelora said, that the new budget canceled more than $250 million in previously approved tax cuts that otherwise would have taken effect in the next year. One involved canceling a surcharge on the corporation tax. Another involved restoring the ability of low- and middle-income houses without children to claim a $200 property tax credit within the state income tax.

A third opportunity to provide business relief, this time for restaurants, also was scaled back dramatically. The legislature’s Finance Committee had recommended letting restaurants keep $50 million in state tax receipts it collected over the next year — a one-time bailout for one of the industries most heavily battered by the pandemic. The final plan built into the budget limited the relief to $7 million.

But Republicans had their hands full, Candelora said, battling to kill the state tax increases proposed in the new budget. And paying down Connecticut’s massive pension debt is better than launching new programs the state may be unable to afford when federal dollars expire two years from now.

“Which poison are we going to choose?” Candelora asked.

UConn economist: Don’t stuff pandemic relief under the mattress

McCaw, the state’s budget chief, agrees.

“The volatility cap was established based on the premise that those revenues are unpredictable and can easily disrupt budget forecasts,” she said. “If we are serious about continuing Connecticut’s recent successes and making ourselves more attractive to new residents and businesses, we need to maintain our commitments to address the problems that have haunted us for decades and impeded our growth.”

But Fred V. Carstensen, director of the University of Connecticut’s economic think-tank, said putting the COVID relief dollars in the pension fund is a mistake.

Carstensen, who heads the Connecticut Center for Economic Analysis, warned in May the state might need a decade to regain all lost jobs and fully recover from the pandemic if it put any of the federal relief dollars “under the mattress.”

The UConn economist urged legislators to compromise, investing both in tax incentives as well as key services like education , job training and health care — even if it meant raising state taxes two years down the road.

With a full commitment to recovery, the state could regain all of its jobs by the mid-2020s, the center projected.

Carstensen boiled his recommendation down to a simple analogy:

“Do I borrow money to pay for my daughter’s education, and permit her to become an engineer and make $160,000 a year?” he said. “Or do I say you’re brilliant but you’re going to work at McDonald’s because I ain’t borrowing the money?”