Governor Lamont is violating the fiscal guardrails, converting them from a regime of budgetary discipline into a conduit of money to fund the pay of Connecticut state employees already making higher wages than in 48 other states and, secondarily, to fund a few priorities of progressive Democrats.
He is modifying the most powerful guardrail, the Volatility Cap, which intercepts income tax revenue from stock market gains before this revenue reaches the budget and re-channels it into state pension funds, which are severely underfunded. Lamont is allowing $300 million more into the budget (less into the pension funds) in Fiscal 2026 and Fiscal 2027 and annually thereafter. Not chump change.
Now, let’s look at the Reserve for Salary Adjustments (RSA), the account into which money is put in new budgets to cover future wage increases for state employees: $130 million for Fiscal 2026 and $240 million for Fiscal 2027. That’s real money.
You do not need to be a seeing-eye dog to notice the connection between the two sets of figures. Progressive Democrats have been clamoring for more money to spend in the budget, so they will get a net increase of $170 million in FY2026 but only $60 million in FY2027. That is chump change. We’ll come back to this point.
But let’s look at the rationale and the impact of sending $300 million less to the pension funds. The two central purposes of the VolCap are to smooth out revenue that varies, sometimes dramatically, from year to year to ensure budget stability, and to improve funding of the underfunded pension funds.
So, how has the VolCap worked? The VolCap has been instrumental over the last six years in eking out the very limited improvement achieved in the financial condition of the state employee pension fund (SERF). The $6 billion of VolCap deposits into SERF have achieved only a $2 billion reduction (improvement) in the SERF’s serious lack of funds, aka its Net Liability (UAAL), from $21 billion to $19 billion.
If, as Lamont now says, the VolCap grabbed too much money from the start and, at the correct level would have captured $220 million to $280 million less per year than it did, then there would have been $1.6 billion less VolCap money going into pensions. That would have wiped out virtually all the “progress on pensions” (reduction in the Net Liability) that Lamont has been crowing about for the last several years – and in his budget address last Wednesday.
Lamont and his budget masters offer a backward-looking analysis, based upon the pre-2017 period, to argue that the VolCap grabbed too much money.
Yet, the better interpretation is that the stock market has been on a rocket ride during Lamont’s time in office. The S&P Index has risen from 2835 on his Inauguration Day on January 10, 2019 to 6002 today, a 112% increase. That’s what sent “too much” money into SERF. No one would have predicted that!
In essence, Lamont & Co. are saying the stock market rocket ride will continue. That’s a risky bet.
The other rocket ride that’s relevant is the sharp 33% increase in state employee wages to date, a ride to which Lamont is adding rocket fuel, i.e. a seventh and eighth consecutive annual wage increase of what looks like 4.5%. That will bring the cumulative wage increase over Lamont’s two terms to 45%.
An employee making $100,000 in 2019 will be making $145,000 in 2027. You might say that Lamont is locking up the state employee vote for the third term that he is rumored to want very badly.
Now remember one of the missions of the VolCap is to improve SERF funding. Well, when you increase wages, you increase future pension benefits, because pensions are calculated off wages.
With lower VolCap deposits and even higher future pension benefits, it is likely that we will see “retrogression on pensions.” That is unlikely to be Lamont’s rallying cry going forward, but it is the probable reality.
Now back to progressive Democrat’s desperation for more spending money. On-budget, in terms of the net impact of the two largest factors, the VolCap and the RSA, they are getting chump change.
So, what has Lamont done? He has gone off-budget. He is intercepting the normal transfer of year-end budget surpluses (different from VolCap revenue) to the next fiscal year budget (if the budget reserve fund is full) to create an off-budget fund. If the surplus were transferred to the new budget, the $300 million transferred (plus the $300 million bump from the reformulated VolCap) would have sent the budget over its Spending Cap (another key fiscal guardrail).
Lamont is using the intercepted surplus transfer to fund an off-budget trust fund to significantly increase spending on early childhood programs, a key program for progressive Democrats. Early childhood spending is like apple pie. Whether it is efficacious or not, everyone loves it. So, it is a popular move, which is why few will call out Lamont for going off-budget (usually, a no-no) to evade the Spending Cap. And so it has come to pass that the once “sacrosanct” (Lamont’s word) fiscal guardrails are a whole lot less holy now in Lamont World.
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.