Governor Lamont Proposes Long-Overdue Structural Reforms: “This Is the Land of Steady Habits, but We Can’t Continue Along the Same Path and Expect That Things Will Fix Themselves”
(HARTFORD, CT) – Governor Ned Lamont today released a strategic plan outlining real structural reforms to the state budget, specifically around Connecticut’s two major pension systems and state employee and retiree health benefits. The proposal includes cost sharing among municipalities and restructuring the Teacher’s Retirement System (TRS) to adjust the payment schedule. In addition, Governor Lamont will negotiate a maximum price for healthcare services provided to state employees and retirees, and propose risk sharing for cost of living adjustments (COLA). Separately, Lamont is proposing a modernization of the sales tax base by including digital consumer oriented services such as downloading and streaming and eliminating exemptions on goods and services that are historically inequitable.
While some of these structural changes require approval by labor, all are designed to help steady Connecticut’s financial position, stabilize the long-term arc of our state’s finances, and put an end to picking winners and losers within our tax code. Instituting these changes will also indicate to outside stakeholders – ratings agencies, bondholders and businesses alike – that the state is serious about reforming its finances for the long-term.
“While I love history and tradition, there is no reason to continue with bad or outdated policies that are no longer working for the people of this state,” Governor Lamont said. “We are anticipating a $3.7 billion dollar budget deficit over the next two years, with additional deficits on the horizon. Taxpayers are tired of hearing this year after year, and rightfully so. This is the ‘Land of Steady Habits,’ but we can’t continue along the same path and expect that things will fix themselves. Our state needs to make real, substantive structural changes to facilitate a sustainable financial future. As the economy and peoples’ habits change, we need to demonstrate that Connecticut’s state government can keep pace.”
Modernizing the Sales Tax Base
Governor Lamont’s proposal will bring our tax code into the 21st century – and make it fairer – by capturing a growing share of the digital economy and expenditures on consumer-oriented services. The expansion would raise the state $292 million in FY 2020 and $505 million in FY2021.
- Goods and services will be taxed equally: Equal tax treatment levels the playing field and discourages the purchase of certain items in lieu of others. For example, it doesn’t make sense to apply the full sales tax to the purchase of a movie on a disc, but not the electronic downloading or streaming of the same film. Nor does it make sense to tax the materials you need to repair or renovate a home, but not on the architect, engineer, or contractor who do the work.
- Groceries will not be taxed: To ensure the broadening of the tax base doesn’t impact our lower-income households, Governor Lamont proposes to retain exemptions for basic needs, such as food and prescription drugs, but eliminate most other exemptions currently on the book – for example, exemptions for horse boarding, boat storage or the rental of a campsite. There is no rhyme or reason to many of these exemptions and they artificially manipulate the market.
Shoring Up the Teachers’ Retirement System and Stabilizing Annual Required Contribution
Working with Treasurer Shawn T. Wooden, Governor Lamont is proposing long overdue changes to the Teachers’ Retirement System. If nothing is done, teacher pension annual costs could increase by nearly $2.1 billion, from $1.3 billion in FY2019 to $3.4 billion by 2032 if the state does not meet its optimistic current investment return assumption, and potentially could increase by billions more if there is a market downturn.
Some of the proposed changes mirror those made to the State Employees Retirement System in December 2016 and include:
- Reducing the assumed rate of return to 6.9 percent from its current 8.0 percent: While there have been years when investments have returned far more than 8 percent, the average over the past three decades shows that those periods are balanced by markets that underperform. Experts believe this is an unrealistic assumption going forward. We need to be realistic about what can be earned on investments, and setting reasonable expectations for how markets will perform will be essential to reining in the unfunded pension liabilities.
- Adjusting the financing schedule to create a new 30-year period: Currently, the majority of the unfunded liability is scheduled to be paid over the next 12 years, which greatly increases the risk of large increases in required contributions. This proposal will stabilize payments by extending the repayment of the current unfunded liability over a 30-year period and smoothing future gains and losses over a longer period. It took more than a century to create the liabilities with teacher pensions, and it is unreasonable and risky to attempt to resolve it all in a short period.
- Strengthening our commitment with the 2008 pension obligation bond covenants: Moving forward, a TRS Special Capital Reserve Fund would be established in order to meet the “adequate provision” requirements of the 2008 pension obligation bonds. Funding of the reserve fund would be accomplished by reserving $381 million of the fiscal year 2019 General Fund surplus. The Special Capital Reserve Fund would be backstopped by lottery receipts in the unlikely event a replenishment of the reserve was needed. The proposed changes will result in contribution savings of $183.4 million in FY 2020, $189 million in FY 2021 and will be nearly $1.5 billion lower than the projected $3.4 billion FY 2032 contribution that would have been required if we make no changes while achieving a 6.9 percent return.
“The plan to restructure payments into the Teachers’ Retirement System represents a new road map for Connecticut’s fiscal future and stability, while minimizing the impact on taxpayers,” Treasurer Shawn T. Wooden said. “It also will allow scarce resources to be directed to the right priorities like economic growth, education, and infrastructure that can move our state forward. Creating this multi-faceted proposal in a matter of weeks is an extraordinary accomplishment and is evidence of what can be done when government works collaboratively.”
In addition, Governor Lamont is proposing a municipal cost-sharing plan under which each municipality or local board of education will be responsible for at least one-quarter (25 percent) of the normal pension cost paid on its behalf by the state. Those municipalities who have teacher salaries above the statewide median will be asked to pay a share equal to each percentage point they are above the median. To avoid further burdening struggling towns and cities, all distressed municipalities will contribute five percent of their associated normal cost.
“We need to think about these long-term obligations as we would a mortgage,” Governor Lamont said. “You wouldn’t pay off your mortgage in a decade, and Connecticut shouldn’t try to do the same with its pension obligations. Stretching out our payments over a longer period of time will allow us to avoid market volatility and bumps, and provide the breathing room to make critical investments in workforce and economic development, transportation, and education so we finally get Connecticut growing again.”
Streamlining the State Employees’ Retirement System
Governor Lamont is proposing adjustments to the State Employees Retirement System to save the state $131.9 million in FY 2020 and $141.8 million in FY 2021. This reflects the realities of the marketplace and the state’s ability to pay.
- Risk-sharing for the Cost of Living Adjustments (COLAs) for future retirees: Make the COLA amount match the market returns. In years where fund investments do not meet their anticipated market performance, COLAs will be limited to no more than one percent, in years where investment performance exceeds expectations that limit is increased to three percent and the limit is increased to five percent when the fund exceeds its targets by more than three percent. This risk-sharing arrangement allows members to benefit when the fund is growing, while reducing outlays when adverse market conditions exist. This is similar to the provision in the TRS.
- One financing schedule to be paid by 2046: Under the current system, approximately 20 percent of the unfunded liability as of 2016 was scheduled to be resolved by 2032, while the remaining 80 percent was scheduled to be paid by 2046. This proposal would put the entirety of the 2016 unfunded share on one financing schedule to be resolved by 2046, creating a more streamlined payment schedule.
- Removal of mileage reimbursements from pension calculations.
Controlling the Rising Cost of Healthcare
The State of Connecticut provides healthcare coverage for approximately 200,000 people, including state employees, retirees and their dependents. Healthcare is also one of the major cost drivers of the General Fund budget. Working with Comptroller Kevin Lembo, Governor Lamont proposes the following, which equates to $50 million in savings in FY 2020 and $135 million by 2021:
- As the largest employer in the state, state government will negotiate a maximum price it will pay hospitals, clinics, providers and others for services: This rate will be a percentage of Medicare and will help ensure equity between hospitals, clinics and providers to ensure that the state doesn’t pay $24,000 for a knee replacement at one hospital and $50,000 for the same procedure at another hospital.
- Expands wellness and cost-saving programs such as the Health Enhancement Program and Smart Shopper: These programs promote healthy behaviors, encourage participants to make informed provider choices to achieve better quality outcomes, provide a financial incentive to the employee for their compliance and success, and save the state money.
“Connecticut is going to call the shots on healthcare quality and cost,” Comptroller Lembo said. “The healthcare market should be driven by transparent prices for quality products and successful outcomes for patients, not by arbitrary pricing schemes that seek to squeeze the state and individual consumers out of anything they’re willing to pay for care. I look forward to collaborating with Governor Lamont and all stakeholders on these structural changes to our healthcare system.”
“While some of the structural changes for state employees must be negotiated with the labor unions, we have already begun discussions in good faith,” Governor Lamont said. “I know they care deeply about the future of the state and want to help get our state growing again.”