Lamont's budget is not playing by ARP rules
States have done many things with the federal aid that state governments received under last year's $1.9 trillion American Rescue Plan (ARP). One thing they are expressly prohibited from doing is pouring that money into pensions for well-paid public employees. Connecticut is doing it anyway.
In February, Gov. Ned Lamont's released his $48 billion two-year budget proposal. It funnels $2.9 billion in special deposits into the state employee and teacher pension funds. This is an amount equal to all the ARP aid the state received. These special deposits are over and above Connecticut's regularly scheduled $7.2 billion in state contributions to the two retirement systems.
A year ago in February before ARP became law, Lamont outlined his plan for the federal stimulus money, "If additional federal aid for state and local governments is not enacted," his budget proposal read, the state would draw down its rainy-day "budget reserve fund (BRF)." But if "unrestricted" federal assistance came through, the state would use that money — rather than the BRF money — to shore up the general budget. That would leave the BRF overstuffed. Under state law, when the BRF exceeds 15% of the annual budget, the excess must be moved into the pension funds.
ARP became law in March 2021. Connecticut received $2.9 billion under the law, and the state moved $1.6 billion into the pension funds last September. In his new proposal, Mr. Lamont says he will move another $1.3 billion into the funds. But the federal money isn't "unrestricted." Sections 602(c)(2)(B) and 603(c)(2) of the ARP prohibit the deposit of these funds "into any pension funds." This sets up a direct conflict between federal and state law: Federal law prohibits the deposits while state law requires them.
In its initial report to the Treasury Department last summer, Connecticut claimed the use of $1.75 billion of ARP expenditures to replace revenue losses, without including the required calculations of the amount or the required explanation of "how revenue replacement funds were allocated to government services." The state said simply that it would use the money "to support budget balance."
In his new budget, Mr. Lamont has reduced the claimed revenue loss to $940 million. Yet, he still hasn't disclosed the required calculations and uses. The problem is that the $2.9 billion in ARP assistance can't replace two budget items — the drawdown of $2.9 billion from the BRF and the $940 million in lost revenue — which total to a greater amount than the aid received.
Treasury should disallow Connecticut's deposits into its pension funds. The state has many better uses for the money. Mr. Lamont has complained for years about inadequate transportation funding, yet his new budget includes little new money for transportation.
The Treasury sets forth various "eligible uses" for ARP funds, including repayment of federal advances to state unemployment insurance trust funds. Connecticut owes about half a billion dollars in these advances, which must otherwise be repaid by increased taxes on businesses. What better way to spur growth in the state than to relieve businesses of this burden?
Connecticut is struggling economically. The most recent data show the state tied for the fifth-highest state unemployment rate, with a labor force that has contracted more during the pandemic than 42 other states.
Yet, no Connecticut state employee was laid off during the pandemic due to a long-term contractual no-layoff guarantee.
Connecticut state employees are the fifth-highest compensated in the nation relative to their private-sector counterparts, according to a new study of state employees in the 50 states commissioned by Connecticut-based Nutmeg Research Initiative. (Nutmeg engaged me to organize the study. I recruited Andrew Biggs PhD., who conducted the study, and wrote the preface.)
The ever-increasing compensation continued during the pandemic, with state employees receiving a healthy wage increase in mid-2020 that was too recent to be included in the study. Even Lamont said that increase was unfair coming when hundreds of thousands of workers in Connecticut were losing their jobs.
Now, Lamont has proposed to pay state employees enormous wage increases over the next three and a half years.
According to The CT Mirror, Lamont has proposed an immediate $3,500 bonus payment, or 4.5% of the average employee's wage of $77,000, as reported in the most recent report of the state's actuaries. In addition, he intends to pay 2.5% annual wage increases in each of the next three years while also paying unquantified "step increases," which in past years have averaged about 2% across the workforce, according to the state's Office of Fiscal Analysis.
Meanwhile, the state employee pension system remains one of the worst funded in the nation, with employees contributing below-average amounts to their own retirement benefits.
It is almost impossible to improve the funding of a pension fund when employees make such meager contributions and the retirement benefits of new retirees are based on such high wage levels.
Red Jahncke is president of The Townsend Group Intl, LLC, based in Connecticut. This is an updated version of a column which appeared previously in The Wall Street Journal.