For months, Governor Malloy and his administration have been assuring the media and the public that this year’s budget was balanced and next year’s budget included a hefty surplus that could be used for – among other things – the education reforms that are being discussed and trumpeted in Hartford.
Last week, an independent report came out that revealed that while the State Employee Pension Fund was doing marginally better, the pension savings that the Malloy Administration had promised would come from changes negotiated in the Malloy/SEBAC agreement were not amounting to anything close to what they had promised.
In fact, it was fluctuations in the Stock Market and the state’s return on investments, and not the pension changes, that were providing the funds needed to balance that portion of the state budget.
As is their style, the Malloy Administration brushed away concerns and criticisms about their inaccurate estimates and stayed true to their rhetoric saying that everything was fine, all the Malloy/SEBAC savings would be achieved and the budget was balanced.
Yesterday we learned that the problems go much deeper than simply getting it wrong on the pension fund savings.
Early this month, the Governor’s Office of Policy and Management projected that the state was on track to have an$80 million dollar surplus. Yesterday, that same office, in a joint report with the General Assembly’s Office of Fiscal Analysis, revealed that tax revenue was down at least $95 million in this fiscal year (FY12) and would be down another $139 million next year.
Connecticut went from a surplus to a deficit in one day.
Of course, the problem has been known for a while, but the Administration chose to keep the information secret hoping that something would change.
OPM has claimed that they could not project income tax revenues until January 15, 2012, the date the last quarter income tax withholding reports were due.
Yet, as every accountant and business owner knows, a company and individual’s overall tax situation is almost always evident by the quarterly report that was due on September 15, 2011. That date was moved and as information came in OPM simply decided that they would not share their tax information with the rest of us.
The first victim of this budget collapse appears to be the Governor’s promised effort to shift the state toward GAAP (Generally Accepted Accounting Principles).
For More information about this development check out CTNewsjunkie: http://www.ctnewsjunkie.com/ctnj.php/archives/entry/balanced_budget_forecast_begins_to_unravel/ and CTMirror: http://ctmirror.org/story/15087/budget-hovers-brink-deficit-malloys-fiscal-cushion-erodes-quickly..
Meanwhile, let’s return for a moment to the news about the State Employee Pension Fund because it is such a perfect example of this Administration’s approach to state budgeting.
As I wrote in yesterday’s blog, in February 2011, Governor Malloy announced that in addition to tax increases and budget cuts he would balance the state’s upcoming bi-annual budget with $2 billion in savings from state employees.
As one of the loudest critics of the governor’s approach, I’ve been writing about this topic on a regular basis, going so far as to state that there was no way those savings could be achieved.
When the Malloy/SEBAC agreement was reached, the parties announced that it would save the state $1.6 billion over the next two years rather than the promised $2 billion. [The difference was made up by sliding a larger than expected surplus in FY11 to FY12].
The Malloy/SEBAC savings were scheduled to come from a variety of different areas including the freeze in state employee wages, the elimination of longevity payments, changes to the state employee healthcare and pension system and a number of targeted budget reductions. The non-partisan Office of Fiscal Analysis could only confirm the value of about one-third of the savings.
But the Malloy Administration remained adamant that it would get all the savings it projected.
The changes to the state employee pension system were calculated to save the state $237 million this year.
Late last week, Keith Phaneuf of the CTMirror, explained the latest development with the pension fund in his “must read” article – see: http://ctmirror.org/story/15039/pension-report .
In order to balance the state budget in 2009-2010, Governor Rell negotiated an agreement with the state employee unions that allowed the state to reduce its payments to the Connecticut State Employee Pension Fund.
Rell and the Democratic Legislature decided to forgo about $314 million in pension fund contributions.
The impact from the reduced payments and drop in the stock market left the State Employee Pension fund with assets of about $9 billion and long-term obligations of $21 billion (or a funded ratio of 44.4 percent – one of the lowest ratios in the country – the appropriate funding ratio is in the range of 80 percent).
Last week, a new actuarial report on the Connecticut’s State Employee Pension Fund has determined that the fund now has assets of $10 billion dollars with long-term obligations of $21 billion (or a funded ratio of 47.9 percent).
The immediate effect of this development is that this year Connecticut will have to make a pension contribution of $926 million instead of the $939 million that was part of this year’s approved budget. (A savings of $13 million)
Thanks primarily to the bizarre ups and downs of the US stock market, the State Employee Pension Fund got over 21 percent on its investment over the last year compared to the 8.25% that was expected.
Although the expected pension savings from the Malloy/SEBAC” agreement did not materialize, this piece of the budget balanced thanks to the incredible return the Fund received.
The new actuarial report is vague but it appears that about $67.5 million of the $237 million expected savings (about 28 percent) was the result of the pension agreement while well over 70 percent of the goal was achieved due to the return on investments.
In what has now become a classic response, Ben Barnes, the Secretary of the Office of Policy and Management, told the CTMirror “thank heaven it was with us [the stock market growth], but market timing wasn’t really a factor for us.”
The state projected that it would save $237 million in pension costs as a result of the Malloy/SEBAC agreement.
It failed to do that, but thanks to the stock market and investments, the state got that money that it needed; which is good news.
Sticking to his political “talking points”, and despite the recent evidence, Secretary Barnes said that he remains confident that the Malloy/SEBAC agreement will, in fact, save the state $700 million this year and $900 million next year.
And for the record, I remain convinced that the Malloy/SEBAC agreement will not achieve the amount of savings that have been projected and along with the “new” news that revenues are down, Connecticut’s State Budget is far from balanced.