State governments can do many things with the Coronavirus State and Local Fiscal Recovery Funds they received under last year’s $1.9 trillion American Rescue Plan. One thing they are expressly prohibited from doing is pouring that money into pensions for well-paid public employees. Connecticut is doing it anyway.
Gov. Ned Lamont’s just-released $48 billion two-year budget proposal funnels $2.9 billion in special deposits into the state employee and teacher pension funds. This is an amount equal to the federal aid the state received under the American Rescue Plan. These special deposits are over and above Connecticut’s regularly scheduled $7.2 billion in state contributions to the two retirement systems.
Mr. Lamont outlined his plan for the federal stimulus money in February 2021, before the American Rescue Plan became law. “If additional federal aid for state and local governments is not enacted,” Lamont’s budget proposal last year read, the state would draw down its rainy-day “budget reserve fund.” But if “unrestricted” federal assistance came through, the state would use that money—rather than the rainy-day reserve—to shore up the general budget. That would leave the budget reserve fund overstuffed. Under state law, when the budget reserve fund exceeds 15% of the annual budget, the excess must be moved into the pension funds.
The American Rescue Plan became law in March 2021. Connecticut received $2.9 billion under the law, and the state moved $1.6 billion into the pension funds in 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 American Rescue Plan Act prohibit the deposit of these funds “into any pension funds.” This sets up a direct conflict between the substance of 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 $1.75 billion of American Rescue Plan 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.” All the state said was that the federal money was needed “to support budget balance.”
In his new budget, Mr. Lamont has reduced the claimed revenue loss to $940 million. The state apparently feels flush, but it still hasn’t disclosed the calculations the stimulus law requires. The problem is that the new $2.9 billion in American Rescue Plan assistance can’t replace two budget items at once. It replaces either the drawdown of $2.9 billion from the reserve fund or the $940 million in lost revenue.
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 funding for transportation, but his new budget does nothing to address this.
The Treasury sets forth various “eligible uses” for American Rescue Plan 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 46 other states. State employees are the exception. According to a new American Enterprise Institute study, Connecticut public employees are the fifth-highest compensated in the nation relative to their private-sector counterparts. Many jobs were lost during the pandemic, but not among Connecticut public-sector workers, who enjoyed a contractual no-layoff guarantee. Public employees received a wage hike during the pandemic that even Mr. Lamont called unfair. They have contributed below-average amounts to their own retirement benefits over the years. If their pension fund is underfunded—and it is—employees should make bigger contributions to bolster it.
Red Jahncke is a nationally recognized columnist, who writes about politics and policy. His columns appear in numerous national publications, such as The Wall Street Journal, Bloomberg, USA Today, The Hill, Issues & Insights and National Review as well as many Connecticut newspapers.