Lee Elci: All right welcome! 37 min after 8 o’clock here. Every Wednesday, we bring on Red Jahncke.
I’ve got a couple specific questions to kick this thing off, if you don’t mind. You ready to rock and roll today.
Red Jahncke: I’m ready to rock and roll.
Lee Elci: All right. So Governor Lamont once called Connecticut’s Fiscal Guardrail “sacrosanct.” How significant is his decision to modify the Volatility Cap! And do you think this sets a dangerous precedent.
Red Jahncke: Yes, I do. There are a couple of income tax revenue streams that are capped at a certain level, above which all revenue is redirected into the state employee pension fund. He has raised the cap. So, $300 million less is going to go into the pensions. That’s the 1st violation of the fiscal guardrails.
Now, as a justification for doing that, he says that the guardrails were originally set based upon a single year’s experience. He said we should have had a 5-year average and set the level for the volatility cap based on 5 years of experience. 5 years of experience going backward. Well, that’s a very convenient way to justify what he’s done. It doesn’t change the fact that he is violating the fiscal guardrails. He’s just offering an excuse.
The better interpretation of the level of the guard rails is not a backward look. The reason so much money has gone into the pension funds as a result of the volatility cap is, we’ve been on a rocket ride in the stock market. The S&P Index has doubled while he’s been in office – more than doubled. It’s gone from 2800 to 6000? That’s why all this money has poured into the State Employee Pension Fund.
Now, you reset the volatility gap going forward, you are implicitly saying that rocket ride is going to continue. That’s not the theory of the volatility cap. The theory of the volatility cap is rocket rides don’t last forever. They’re often followed by cliff dives. So when the next cliff dive takes place, a whole lot of revenues can disappear and not go into the pension funds. That’s violation number one.
So there’s a second provision of the fiscal guardrails. Second most important, if you will, which is the Spending Cap and the Spending Cap basically says you can’t spend more than you earn – more than you produce. So, the Spending Cap is tied to the State’s increase in personal income, aggregate personal income or inflation, whichever is greater. Spending beyond those 2 metrics means you’re spending beyond the capacity of the state economy. That implies in the future a tax increase.
Lee Elci: We’re talking with Red Jahncke, and he’s got a column out right now. You can get it. The-red-line.com. I will, of course, post it, as we always do up on our social media platforms as well. So, you can read it that way as well. You know, Red, I’m going to back you up just for a second, because I’m getting a couple of people who have just very general questions, and rather than have me try to explain it later. Let’s do it now. What exactly is the volatility cap.
Red Jahncke: It is this. There are 2 streams of income tax revenue, both of which are paid by quarterly estimated tax payments originated by and sent in with quarterly returns -mini returns – by people who earn money outside of a job. These are people who invest in the stock market, make money in the stock market. It’s not a job. There’s no payroll check.
There are 2 broad divisions of income tax revenue. The largest is “withheld” income tax revenue. That’s paychecks. Everything else is comes through these quarterly estimated payments from taxpayers. The lion’s share of that are stock market income. Okay, that income is considered to be volatile. Thus, the term Volatility Cap.
It is capped at a certain level on the theory that the stock market is a yo-yo. Some years and some stretches of years, it takes a rocket ride and it [income tax from gains] shoots right over the Volatility Cap. All the excess goes into the state employee pension fund – 1st to the Rainy Day Fund, which it must be full – then the excess goes into the State Employee Pension Fund.
Then, the stock market plummets, and the revenue from those sources falls way below the Volatility Cap. Everything below the Volatility Cap goes into the budget. I should have said that at the beginning. The budget is coming up short because we’re well below the Volatility Cap. We’ve fallen 2, 3, 4, 500 million dollars below the cap. That means that much less money is going into the budget. The budget is running into a relative crisis. We draw down the rainy day fund.
So that’s the interplay around the Volatility Cap. It’s meant to have 2 purposes, one to stabilize budget matters. So when we have [a] great stock market. we put aside the excess and when we don’t have enough revenue [in] a lousy year in the stock market, we draw down from the Rainy Day Fund, and you’ve got some budget stability.
The second purpose is to increase the funding of the state employee pension fund, which is severely underfunded. We’re perennially in the bottom 5 states in terms of funding of our pension fund. So, Lamont is underfunding the Pension Fund. That’s the second thing about the Volatility Cap.
The other violation of the Fiscal Guardrails relates to the Spending Cap. Because he’s pulling down $300 million more than before he violated the Volatility Cap and changed the calculation, he’s now got $300M more coming into the budget.
The budget normally takes the surplus from the prior year and transfers it into the next year’s budget. That’s about $300 million. If he let the $300 million into the budget, plus the $300M extra from raising the level of Volatility Cap, that $600M would send spending over the Spending Cap. So what’s he doing with that year-end surplus from last year that should go into this year’s [budget]. He’s intercepting it and creating an off-budget spending program. That’s violation number 2.
That’s just a violation of good budget practice. If you’re going to have a budget, you should have everything in it. What’s the point of having discipline within the budget, if every time you want to spend more money, you just go off-budget. So that’s what Ned’s doing. He is going off budget to spend the money he wants to spend.
Lee Elci: And what? What’s he spending that money on.
Red Jahncke: He’s spending it on early childhood programming. That’s popular. Virtually no one will argue against education spending. It’s apple pie and early childhood education spending is especially popular – if you will, apple pie on steroids. So, he’s ducking all of the of the criticism he should get for going off-budget by taking the most popular spending category off-budget. It’s [a] very calculated what he’s doing.
Lee Elci: Sure. Red Jahncke with us. The-red-line.com is where you can find his website. We chat with him every Wednesday. He has been going hot and heavy after not only state employees, the budget, Lamont, for the better part of probably closing in on 6 plus months. Now and again his latest pieces out, which you can read, and I will again attach to our social medias. We only have time, probably, for one of these 2 topics, so I’ll let you choose. You want to go back and highlight pension, or you want to double down on state employee pay increases.
Red Jahncke: Well, pay increases are under Lamont. It’s a 33% compound rate over 6 years. The private sector, if you go to the Bureau of Labor Statistics, has enjoyed only a 23% increase nationwide. Inflation is 26%. So, our state employees are beating the private sector by a huge margin and inflation by a very healthy margin.
This is, this is a manpower question. What do we need to pay people to hire out of the local labor market? If you’ve got a 10 point advantage over the private sector, you’re overpaying in order to recruit talent. It’s as simple as that. and taxpayers should not stand for that. They should require that Lamont run an efficient staffing regime.
Lee Elci: We were talking briefly yesterday, and you had mentioned something about the State police to getting a bump in pay. Is that part of this column, as well.
Red Jahncke: Well, you know what SEBAC contracts are. That’s what we’re talking about. They’re an umbrella agreement, under which I think there are some 30 odd, different bargaining units who are part of SEBAC. Now’s the time to define SEBAC. It’s the State Employees Bargaining Alliance Coalition. So all 33 bargaining units unify and beat up the governor on a collective basis.
Underneath, there are individual negotiations for each unit under that umbrella. They benefit from 4.5% wage increase. Then they negotiate for a whole bunch of other stuff – work rules, tuition credits, so on and so forth. So it’s a 2 level bargaining process. The one that citizens really should focus on is the SEBAC umbrella agreement. Getting down into 30 different bargaining units and trying to follow that and explain. That is a fool’s errand. You’re never going to accomplish that, I mean, Lee. If your eyes roll and glaze over at the conversations we have, you can’t imagine. Okay.
Lee Elci: Right, I can. No, I can’t imagine I can’t. I get it all right, Red, we’re going to run out of time any last thoughts.
Red Jahncke: The other point of the column is, he’s tipped his hand. He’s going to give state employees another pay raise. We know that because there’s an account in the State budget that the governor has to fill in every time he makes a budget proposal. It’s called the Reserve for Salary Adjustments. It tips the governor’s hand on wage increases. He’s going to award state employees wage raises in this coming fiscal year 2026 and the next year, 2027. It’s a quarter of a billion dollars in 27. I mean, this is not chump change. These state employees are getting a lot of money on top of what they’ve already gotten. So I’ll leave you with that.
Lee Elci: Red. Good stuff, man. We’ll talk again next week. The-red-line.com check it out. Red, I’ll talk to you. Have a good week.
Red Jahncke: You the same. Appreciate it, Lee.
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.