Governor Lamont's Fiscal Year 2020-2021 Biennial Budget Address

Fiscal Year 2020-2021 Biennial Budget Address
Governor Ned Lamont
Hall of the House of Representatives, State Capitol
February 20, 2019

A Path Forward


Mr. President, Mr. Speaker, Senator Fasano, Representative Klarides, my fellow state officials, members of the General Assembly, Lt. Governor Bysiewicz, honored guests and the people of the great State of Connecticut.

Today, I am presenting you a budget which gives us the best chance to get this state growing again. Connecticut has been a jobs laggard for many years, which depresses opportunity and hits our budget every year. If we had grown jobs at the same rate as other states, we would be talking about how to invest our surplus or cut taxes. Instead we are staring down the barrel of a $3.7 billion dollar deficit over the new two-year budget cycle.

I will not allow this budget to be another scene from Groundhog Day, where I come to you year-after-year hat-in-hand lamenting the fact that we still haven’t addressed our structural deficits.

The fiscal crisis before us is not just a short-term hole in the budget. We are digging that hole deeper by $400-$500 million annually, due to fixed costs such as pensions, state employee healthcare and bonded debt – all growing faster than our economy. Most of these fixed costs pay for the past rather than investing in our future.

Fixed costs inherited from the past consume nearly a third of Connecticut’s budget – much more than our peers. This hurts our ability to make investments in our future – putting us at an enormous competitive disadvantage.

But I can’t fix this chronically broken budget without each and every one of you. The legislature is a co-equal branch of government and I need you at the table, helping me explain to business and labor, our mayors, our boards of education, and most importantly our taxpayers what we are doing and why. Where we differ, don’t hold a press conference. Come talk to me! Let’s take a breath, and suggest a better alternative – but the numbers must add up.

As George Washington tells Alexander Hamilton – my last Hamilton analogy, so help me God – Winning is easy, young man, governing is harder. Let’s prove them wrong.

Let’s try a different type of politics, and let’s not wait until the summer to do it. Loudly, and from all across the state, I heard the same thing from our local leaders – Ned, I can live within my means, but I need to know what those means are so I can plan accordingly. So, if you hate my proposal today, don’t wait until June to say no. Let’s get to yes – sooner rather than later.

Structural Reform for a Sustainable Future

When it comes to balancing the budget, my urgent priority is stabilizing the teachers’ pension fund. It is badly underfunded and doesn’t keep faith with our current teachers, especially the younger ones. The state compounded the problem by layering on a pension obligation bond, which, let me put this gently, did not work out the way we hoped.

Now let me be blunt, if we do not fix the financing schedule, our current payment plan could have disastrous consequences. Our annual contributions to the Teachers’ Retirement Fund could end up being higher than the amount the state spends on education.

Working closely with Treasurer Wooden, we’ll restructure our pension contributions. This will reduce our annual payments, reduce our financial risk and give teachers the confidence that their pension will be there when they need it. We’ll also assume a more conservative and realistic rate of return assumption.

Similarly, the state employee plan still represents a large share of the overall budget and accelerates state payments by $100 million dollars a year – an unacceptably high cost which would either force draconian cuts to needed services, or large tax increases.

Working with the Treasurer and our friends in labor, we hope to smooth out the payments in both pension systems, so our annual contribution is a lower percentage of our budget over the next generation. This is similar to what you would do on your own home mortgage.

To those who might say that stretching out these mortgage-like payments over a longer time-period is just more kicking the can, I would argue that this crisis was generations in the making. We need the breathing room to maintain our current commitments, invest in education, transportation and workforce development, and provide stability to our towns and cities, some of which are struggling with solvency issues of their own.

In addition, we must slow the rate of increase on our pension obligations and tie future cost of living increases to the performance of our pension fund. When markets perform well, the cost of living adjustment goes up, and when markets are down the COLA is less generous. Our teachers are already on this track. This will require negotiations, but let’s start here.

These pension reforms do not solve for world peace – they are just a start, but they offer a reasonable basis for long-term fiscal stability and building business and consumer confidence, which is a precondition to getting our state growing again.

The next big structural reform focuses on healthcare, specifically state employee and retiree healthcare. The State of Connecticut provides healthcare coverage for approximately 200,000 individuals. Let me be clear, we are not taking away anybody’s healthcare, a deal is a deal.

But our healthcare costs are growing much faster than our economy, meaning that we must do a better job of controlling costs if we are to continue investing in our future.

Comptroller Lembo and our team are working with our state employees to forge a path where the state no longer pays whatever a healthcare provider charges, but instead sets a ceiling on the maximum price the state will pay. There is no correlation between quality care and cost - and the cost is all over the map.

Listening to good ideas from our state employees, we’re also building upon the state’s “Smart Shopper” program, which provides cash incentives for selecting quality, cost-effective health services. State employees receive quality, more affordable healthcare and the state pays less.

I want to make one important point. To those of you who believe we are not asking enough of our state employees, just remember that these are the folks who work their heart out for each and every one of us – taking care of our parents and our kids, keeping us safe and fixing our roads. While they have a contract that extends out to 2027, I am asking that we sit down together in good faith now, because I know we all care deeply about the future of our state.

Some of the old pros here have suggested that I hold off on these discussions for a few years when I have more leverage – the threat of layoffs to propel the negotiation. Forget it. We can’t afford to wait two years and threatening to layoff our newest employees who are doing important work is not how I negotiate and not how I treat people.

I also know that tens of thousands of our state employees are most likely retiring over the next four years. I have to plan for that. How we work together now to fix our long-term pension and healthcare costs will impact my thinking on the mix of state employees or outside providers in our future.

Some of you think Connecticut needs a “Wisconsin Moment” – where we walk away from collective bargaining and tear up the contracts. I want an anti-Wisconsin moment – a Connecticut Moment – where we show that collective bargaining works not just for retirees but also for the next generation of state employees, and the next generation of taxpayers.

The other portion of our fixed costs that drives our structural deficits is our bonded debt. Over the last eight years, our bond authorizations skyrocketed. In fairness, we made some important capital investments and some nice-to-have investments – but the payback of the principal plus the interest is consuming more and more of our budget. Our budget reduces bonding authorizations by nearly $600 million dollars a year and greatly reduces the fixed cost of debt.

I know you agree in principle, but I’ve heard from many of you asking for money for projects in your district, so be forewarned – if it is not tied to economic or workforce development, or cost-saving shared services, Connecticut is on a debt diet – and I am going to make sure we stick to that plan.

All of us here must also do our part to reduce these fixed costs. I recognize that some of you are proposing bills whereby your car mileage allowance would no longer be rolled into your pension base. Thank you for taking the initiative. When passed, I will sign that bill.

A More Efficient and Responsive State Government

On the operating side of the budget, we are cutting back on middle management. I asked my commissioners for some ideas to cut costs or make their departments more efficient. Some great ideas rose to the top: Commissioner Jim Rovella suggested replacing the State Trooper auto fleet every five years instead of four and putting civilians on desk jobs to allow more State Troopers to do what they do best – protect Connecticut.

At the Department of Motor Vehicles, you won’t need to get your licenses or registrations renewed as often, saving you time and money. We’re also moving more of these transactions online – not in line. Going forward, we will also look at the cost and frequency of licensing for the trades and other professions, as well, to provide additional savings.

We have a leader at the Department of Administrative Services – Josh Geballe – who spent 11 years at IBM. I have proposed a significant investment in technology and IT personnel to modernize and digitize state government. Moving transactions from manual to online can reduce costs by 75 percent. Today, we have over 2,000 different forms and less than 5 percent of them can be completed online. As we digitize these interactions, we will achieve cost savings and a better customer experience. And you’ll see these savings reflected in my next budget.

We expect transparency from our state agencies, and we have to demand it from our quasi-public agencies, such as the lottery, too. I’ve proposed legislation that will ensure we have access to their books and their bottom lines – our taxpayers deserve it.

OK, I hear you: “Cut more now, governor.” First of all, unlike business, I cannot say no to patients on the road to recovery at the Department of Mental Health or to children in crisis at DCF. I cannot tell the elderly that there is no room at the inn. I cannot simply shut down an underperforming department. But we can – and must – provide better service at a lower cost with a more efficient and responsive state government – that starts now.

A Fairer, 21st Century Economy

On the revenue side, because I refuse to pour money into a leaky bucket, I’ve led with structural changes that give us the best chance to stabilize our escalating fixed costs. I have not proposed raising the income tax rate, which has been raised 5 times over the last 15 years. I am not proposing an increase in the sales tax rate because I believe we have to reform our sales tax for the 21st century.

Our current sales tax is designed for a Sears Roebuck economy driven by over-the-counter sales. Today we live in an Amazon economy which is driven by e-commerce, digital downloads, and consumer services.

My sales tax reform would broaden the base so that digital goods are treated equally and more significantly that we are capturing a growing segment of the economy. For example, Movie theatres charge a tax, and Netflix should be treated the same.

Under our budget proposal, consumer-oriented services will no longer be tax exempt. For example, why do you have to pay a tax on manicures but not when you get a haircut?

Expansion of the base helps to make the sales tax more robust, fairer, and raises the revenue we need to get our budget into balance. I have been forewarned, every tax expenditure has a strong lobby behind it and the pushback will be ferocious.

If you find the haircut lobby persuasive, our tireless OPM team, led by Secretary Melissa McCaw – who, by the way, remarked that the security-guards routinely kick her out of the building at 11pm – has modeled how other options will impact our budget.

We welcome you to this debate. If you disagree, have at it, but again the numbers must add up at the end of the day.

A Great Education for Every Connecticut Child

Under our budget proposal, we are maintaining our commitment to education. While some towns that are losing student population will receive a little less, other towns with growing populations and more kids in need will see more investment.

In addition, many of our school districts have chosen to pay their teachers much more than the state median. It’s a great investment for their community. But it’s an investment that impacts the state’s overall pension cost. Our budget will ask every municipality to make a contribution toward normal teacher costs, but towns like Greenwich, which pay teachers 30 percent more than the average salary, will pay more toward their pensions. This reform ensures that municipalities have some skin in the game and the pension burden is shared more fairly.

One big priority for me: recruiting more teachers to our toughest school districts, reaching out to more teachers of color, and more male teachers. We do this by being bolder on the incentives we provide – such as tuition reimbursement and down payment assistance programs. Our children benefit from role models and mentors they can look up to. This is one more step to closing the achievement gap.

And while we’re holding the line on operating costs and bonding, larger schools and districts which pool resources, sharing superintendents and back-office functions, will receive priority for new bonding. Let’s incentivize smart choices and strategic decisions.

Partnering with Connecticut’s Business Community

I prioritize education as the opportunity engine for all of our young people. It’s also the key to workforce development, assuring that our businesses large and small have the talent needed to grow in the future.

I’m asking everyone to do a little bit more, and that includes business. In my proposed budget, they’re not going to get the elimination of the 10 percent surcharge they were expecting this year, but I am proposing to eliminate the Business Entity Tax, which is a costly nuisance, especially to our small businesses.

Today, I’m inviting Connecticut businesses to step up and partner with me to help the next generation of talent repay their student loans and save for their futures. To kick-start this effort, Travelers and Stanley Black & Decker have agreed to offer their own loan forgiveness programs, and together we are inviting other Connecticut companies to join us. Help us train, attract and retain top talent in our state!

Another way to drive economic development to our urban centers and distressed communities is to take advantage of the new federal opportunity zones. By aligning existing state resources to provide targeted support, we can invest tax-free in these areas while creating good jobs.

I am also going to sit down with legislative leadership and the hospitals to restart a more collaborative conversation about their role in ensuring Connecticut’s physical health and fiscal health.

Support for Connecticut’s Working Families

But we all know that workforce development can’t happen without our state’s working families. Many households in the 21st century have either two working parents or a single parent, juggling multiple responsibilities, including caring for infants and elderly. A $15 minimum wage, enacted responsibly and over time would raise wages for almost a third of our workforce, a third of whom are female workers, forty percent of whom are African-American workers, and more than half of whom are Hispanic workers.

Passing a Paid Family and Medical Leave program will ensure that workers who need to take time off for a new baby or recover from illness are not punished financially, and businesses do not risk losing good workers during these emergencies.

I also support fully funding our clean energy and energy efficiency programs, which have been shortchanged over the last few years. These funds help bring down electricity costs for working families, and they further reduce our carbon footprint. I will make sure that we work with labor and vo-tech schools so that more of our citizens get the skills training they need for good paying, green collar jobs.

A Transportation System that Fuels our Growth

In addition to bringing our workplace and workforce into the 21st century, we must bring our transportation system into the 21st century, too – by speeding up our highways and rail service, which are a critical to long-term economic growth and opportunity. This is a budget address: Now, how to pay for it…

Let me say this to everyone: People in this state are feeling squeezed, I know that. They’re struggling, I’ve seen it. And I know this feels like another unnecessary cost they need to worry about. That’s why this has been so hard to come to terms with.

By now, you’ve heard the budget I’m submitting today models two options for tolling – truck-only or electronic tolling on cars and trucks.

Transportation Commissioner Joe Giulietti has been tasked with streamlining the administrative and construction costs per mile, and we will explore public-private partnerships to maximize the value from these new revenue streams. In these partnerships, I will ensure that the public side doesn’t carry the downside risk while the private investors enjoys the upside.

I’ve supported truck-only tolling which could generate $200 million if applied to all major Connecticut highways. While we are awaiting a ruling from the courts regarding truck-only tolling, our attorneys tell me that even if permitted, the tolling could only be done on specific bridges to pay for their rebuild. Assuming our attorneys are correct, the truck-only tolling could provide a down payment on repairing our bridges, but not enough to rebuild our transportation system without additional revenues.

Let me be clear – I do not support raising the gasoline tax, which is already high. Some of you have suggested that we could also use “priority bonding.” But that runs counter to our debt diet, and after 40 years of underinvesting in our transportation system, we cannot borrow our way out of this mess.

I know there are proposals in the legislature that include tolling for cars and trucks. I would only consider this option if we maximized the discount for Connecticut EZ-Pass users and/or offered a “frequent driver” discount for those who are required to frequently travel our major roadways. It’s estimated that out-of-state drivers could provide over 40 percent of tolling revenue for Connecticut. We foot the bill when we travel through neighboring states, it’s time out-of-state drivers do the same for Connecticut.

As my co-equal branch of government, I am open to a real discussion with you, as well as Connecticut’s residents, about the state of our transportation system and what will be needed going forward – not only to make repairs, but to truly put Connecticut on the path to speedier transportation options. If the situation weren’t as dire as it is, we wouldn’t be having this conversation.

Speeding up our rail service from Hartford to New Haven, to Stamford and New York City, with more frequent service to Waterbury and New London, with easier access to Bradley Airport and an upgraded Tweed Airport – working with the community to make sure it benefits everyone - all while moving some drivers from roads to rail, incentivizing trucks to drive at off peak hours - these transportation upgrades are the building blocks of our economic future – but we must start now.

A Path Forward

I recently announced a revitalized economic development team, and the first question they will be asked by employers thinking about expansion, or moving their enterprise to Connecticut is, “I hear your transportation system is in gridlock, how are addressing it?” Rather than nervously looking down at our shoes or checking our watch, our economic development team will instead be able to answer, “I am glad you asked…”

“How about your unfunded liabilities and deficits?” Our team will soon be able to answer, “I am glad you asked…”

“How will you make sure you have the workforce we need to grow and expand?” “I am glad you asked.”

Beyond the two-year budget, we must enact new sources of revenues, such as sports betting and internet wagering. Legalizing recreational marijuana like our neighbors will make for a safer market that will be carefully regulated and taxed. By year three we will see more savings from our investment in new digital systems and online delivery of more services. These are the building blocks of a balanced budget in the future.

In the meantime:

  • This current budget keeps faith with our cities, but not at the expense of our towns.
  • It’s a budget that maintains our commitment to education and provides additional property tax relief.
  • It is a budget that tackles our long-term fixed costs head on and asks all stakeholders to be part of the solution.
  • It’s a budget that focuses on a on 21st century workforce, economy and transportation system which reminds business why they want to be in Connecticut.
  • And it’s a budget that supports businesses and working families alike. It’s a budget that presents a path forward for our great state.

And we can do all of this without raising the tax rates on income or sales.

But imagine what we could do if we get this state growing again. Look, I have been an entrepreneur all my life, starting businesses that have grown and expanded, increasing the top line allowing us to do more and dream big.

Together we can turn this fiscal challenge on its head, use it as a wake-up call to jump start our economy that works for everyone, that grows the revenues we need to continue investing in our amazing future.

Last month I came before you and told you I am a straight shooter, an honest broker and a good listener – I meant it. The budget I have proposed is far from perfect and I welcome your input. Politics in Washington, DC is a dysfunctional mess. Let’s show that here in Connecticut, we can work together on an honest budget, on time, one that gets our state moving again. And when we disagree, don’t go to a microphone, come to my office. Let’s talk. My door is always open.

We are going to do this together. A budget, on time, borne of a chilly February afternoon, completed in time to enjoy a warm spring day and in time for our mayors and first selectmen, superintendents, residents and businesses alike to plan for a fresh start. Now let’s get to work.

Thank you.