Budget talk in Hartford is confusing.
Last week, the media reported that the state is running huge “surpluses.” Yet, Democrats say state programs are being severely squeezed; they want to bust the “fiscal guardrails” and spend more. Republicans say the state is deep in debt, and in danger of falling even deeper; they want to preserve the guardrails.
The public is confused. If there are surpluses, why is program spending being squeezed? If there are surpluses, why is debt growing?
The confusion persists because the elephant in the room is seldom discussed: state employee compensation, which is the highest of the 50 states. Because it is so high and continues to escalate rapidly driven by huge pay raises under Governor Lamont, current wage costs squeeze out program spending, while also driving significant increases in future pension obligations, i.e. debt.
State employee compensation is the largest item in the budget at well over $10 billion annually, or almost 40% of this year’s $26 billion budget.
Why isn’t there greater focus on the biggest item in the budget? One practical reason is that the budget does not have a single line item for state worker wages. Instead, wages are included in the budgets of the agencies and programs for which state employees work. Note, UCONN and state colleges have their own budgets, but the state covers most of their faculty and staff expense in the state budget.
Yet the wage total is easily obtainable. The State Comptroller discloses it as part of the comprehensive data on state finances that is available on the OpenCT website.
In the first four months of calendar 2025, state employee wages totaled $2.09 billion, or $6.3 billion annualized. What makes this number so controversial is that it is up dramatically from $4.6 billion in 2019, the year Governor Lamont took office. Under Lamont state employees have received six consecutive annual pay raises that compound to 33%. A state employee making $100,000 on Lamont’s inauguration day is making $133,000 today. In comparison, over the same timeframe, private sector workers have seen only a 23% increase.
Republicans have proposed a two-year wage freeze. Democrats in the legislature have left raises out of their budget for the upcoming fiscal year, because they are planning to spend more than $200 million over the “guardrails” not including any pay raises.
For his part, despite having recently imposed a hiring freeze and a de facto wage freeze, Governor Lamont told a recent annual meeting of a union for state employees that “every year I’m here, you’re going to get a raise,” a thinly disguised bid for their support in his expected run for a third term.
There’s no confusion about wages. They hit the budget immediately, along with related fringe benefits like payroll taxes and health insurance costs.
Less obviously but inexorably, wage increases increase future pension costs because pensions are calculated based on wages. When wages rise 33%, future pension obligations go up in tandem.
The latest report of pension actuary shows that Lamont’s 33% pay raise has increased future pension obligations from $34 billion in 2019 to $43 billion in 2024 (there’s no 2025 report yet).
Only with the extra $6 billion of special deposits into the pension fund via the Volatility Cap, one of the key fiscal guardrails, was the state able to grow pension fund assets by $11 billion and eke out a meager $2 billion net improvement in funding. The pension fund remains less than 60% funded.
Some analysts say underfunding prior to 2010 caused the underfunding of the pension fund. That is true, but a half-truth. Ongoing overcompensation of state employees is the current cause. It is digging the hole deeper every year.
And because the “surpluses” captured by the Volatility Cap and redirected into the pension fund are necessary to offset the rapid escalation in future pension liabilities – i.e. to prevent a net increase in debt, the “surpluses” are not really surpluses at all.
As long as Governor Lamont awards enormous pay raises, the Volatility Cap deposits will be required just to prevent backsliding to pre-2010 style underfunding of pensions.
Yet Lamont and the Democrats want to weaken the Volatility Cap so that it captures $300 million less each year.
Here’s a simple rule of thumb to eliminate the confusion about “surpluses.” If Lamont continues with robust pay raises, then the Volatility Cap deposits must be labeled “required spending,” not “surpluses.”
If there’s a two-year wage freeze, then upcoming “surpluses” will be genuine surpluses, making it not entirely unreasonable to modify the Volatility Cap slightly to make available increased program funding while still actually reducing pension debt.
Even more simply put, it is ever increasing state employee pay (which is the second-highest, if not now the highest, in the nation) that is squeezing program spending and preventing improvement in the state’s financial condition.
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.