On Monday, Connecticut’s budget forecasters released their first updated revenue forecast since last May, at which time they removed a whopping $2 billion of expected revenue from volatile individual income tax categories over a four-year stretch. The new forecast predicts further declines in these categories, wiping away another $750 million over the remaining three of the original four years.
While declining revenue is never good news, these drastic reductions represent a welcome return to budgetary prudence from the wildly over-optimistic revenue forecasts of fiscal 2023 and from Governor Lamont’s re-election campaign happy talk last year claiming to have ended the era of permanent fiscal crisis in the state.
The crisis is not over. It has merely been papered over by recent federal largess and an unusual gusher of volatile income tax revenue from the stock market’s rocket ride in recent years. These external factors have hidden the continuing slow deterioration of the state’ economy. Employment in the state remains below the level before the Great Recession of 2007-2009.
That frames the essential question: what is Lamont’s plan to revive the state’s anemic economy, which is the only way to reduce its towering crisis-level debt load.
As the Connecticut Mirror reminded in an article last week, “Between unfunded pension and retiree health care obligations, along with bonded debt, the state entered 2023 owing more than $88 billion, making Connecticut one of the most indebted states per capita in the nation,” – this despite the great fiscal good fortune in the form of federal COVID assistance and taxes on ginormous stock market gains.
What is ending is not the era of the state’s permanent fiscal crisis, but rather an era of extraordinary good luck for the state and for Governor Lamont. Future stock market performance is anyone’s guess. Recent good news on interest rates and inflation has sent the market surging. Yet, moderating inflation may be signaling impending recession – less demand chasing supply. Retail sales fell in October, adding weight to that notion. During recessions, stocks do not advance.
In contrast, federal assistance to the state is easy to predict. COVID assistance is over. Moreover, with Uncle Sam running deficits of $2 trillion dollars or more as far as the eye can see, other forms of federal assistance will be extraordinarily constrained. Indeed, if the nation enters recession – certainly, an even odds proposition, the federal government will not be able to provide the fiscal stimulus that it has in the past. Not with the national debt now exceeding GDP and interest payments on that debt running currently at a $1 trillion annual clip and rising rapidly (federal net interest expense hit $76 billion last month up from $43 billion in October 2022).
So, the era of our rich uncle coming to the rescue is over.
Governor Lamont has not offered much of a strategy to improve the fundamentals of the state economy. Indeed, he has done just the opposite. He agreed an outlandishly generous new contract with state employee unions. This has had devastating effect, since labor costs are by far the state’s largest expense – and the origin of most of the state enormous long-term debt.
Facing a looming retirement wave of state employees in spring 2022, triggered by a June 30th effective date for modest reductions in retirement benefits for subsequent retirees, Lamont cut a hairbrained deal. In mid-June before the trigger date, he paid huge bonuses and lumpsum retroactive pay raises to state employees, many of whom retired just days later before June 30th. The state has had to rehire many as “temporary” employees to fill staff shortages.
To his credit, the Democrat Governor has resisted fellow party members in the legislature who have pushed to relax the fiscal guardrails put in place in 2017. Those restraints have kept the state from overspending, except, notably, on labor contracts.
Yet, fiscal restraint is not a strategy. As a businessman, Lamont should know a company or organization cannot cost-cut its way to growth and profitability.
Lamont needs to address key problems which scare off businesses which might enter and remain in the state. Connecticut has the second-highest energy costs of the 50 states.
The corporate income tax, including the perpetually extended 10% surcharge, is among the highest in the nation. Property taxes are the 5th highest nationwide.
The state’s and Lamont’s days of extraordinary good luck are over. It is time for Lamont and his administration to roll up sleeves and get to work on a genuine strategy to grow the state economy.