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State's debt, liabilities still large despite $398.9 million surplus

By Johanna Somers

Publication: The Day

Published September 27. 2013 4:00AM

Hartford - In order to close Connecticut's current debt and liabilities gap, each man, woman and child would have to pay the state $18,000.

The state closed its $20.5 billion fiscal year 2013 budget with a $398.9 million surplus but continues to carry large debt and liabilities. The surplus was due in part to a strong market and high estate tax revenue and capital gains revenue as opposed to payroll tax revenue, which declined by 0.9 percent.

"Connecticut is in a big, difficult situation," said State Comptroller Kevin Lembo at his annual fiscal review on Wednesday. "Can it be fixed? The answer is yes, but sometimes the fixes are 10-, 20-, 30-year fixes. And we need the patience to sort of get through those and make a commitment to those strategies and keep moving forward.

"It's not sexy work. It is difficult, ugly, long-term, belt-tightening work."

The state's bonded debt for capital projects such as school construction and other municipal grants and loans was $17.7 billion at the close of fiscal year 2013, and the state's liabilities, primarily for retirees' pensions and benefits, was $46.5 billion.

The State Employees Retirement System, the major pension system, is funded at 42 percent and has an unfunded liability of $13.3 billion, according to the most recent actuarial report, as of June 30, 2012. The state has an annual required contribution of nearly $1.3 billion for the current fiscal year. Of that, 20 percent is for the current costs of earned benefits for active state employees and 80 percent is for the state to pay down the unfunded liability.

At the press conference, Robert Gribbon, assistant director for budget and financial analysis at the comptroller's office, said the reason the unfunded liability is so large is because it was amortized over a 40-year period beginning July 1, 1991. During the first 20-year period, the state lost the opportunity for investment returns on the portion of the state employee pension that has been unfunded.

The state has also frequently deferred its annual required contribution. If the state had not reduced its annual required contribution for most of the previous 18 years, it would have $2 billion more in the State Employee Retirement System, according to the comptroller's "Year-in-Review" report.

The state paid the full annual required contribution - the amount actuaries initially recommended - in fiscal year 2013, according to the comptroller's report. The majority of the contribution came from the general fund and was the sixth-highest general fund expenditure for the year.

The top five general fund expenditures were, in order: Medicaid, personal services, education equalization grants, debt services and contributions to the State Teachers' Retirement System.

For fiscal year 2013, the state increased general fund spending by only 1.3 percent, which is much lower than historical spending increases, according to the comptroller's report.

The state's bonded debt for capital projects such as school construction and other municipal grants and loans increased by 2.5 percent to $17.7 billion. This bond growth was lower than the average annual growth of 5 percent in the past 10 years.

Lembo and his staff said that lower state spending and borrowing were because the state and the United States are facing a slow economic recovery, as shown by economic indicators such as slow job growth, low consumer credit spending and low U.S. gross domestic product since the 2008 recession.

The state is using $220.8 million of its surpluses for fiscal years 2014 and 2015 and the remaining $178 million for the rainy day fund. Whether surplus would be used to close the debt and liabilities in the future is up to the legislature in negotiation with the governor, Lembo said.

"The legislature has the power of the purse," Lembo said.

j.somers@theday.com

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