One day after his election as Connecticut's governor, Ned Lamont acknowledged the steep challenges that await after his Jan. 9 inauguration.
"I need everybody rowing in the same direction," Lamont told reporters.
Lamont, a former telecommunications executive who will succeed fellow Democrat Dannel Malloy, will have a difficult juggling act in a fiscally strained, politically divided state. On his plate are budget strife, pension funding, toll highway proposals and struggling cities.
"He's got some tough decisions," said Howard Cure, director of municipal bond research for Evercore Wealth Management. "Does he draw on reserves, make cuts or raise taxes? It's tough because the economic recovery in Connecticut has been pretty tepid. A recession could have a negative impact."
Connecticut faces a projected shortfall of $1.7 billion, or roughly 9% of its general fund for fiscal 2020, the first full year under Lamont. The state has about $1.2 billion in its stabilization, or rainy-day fund, and Lamont has said he would not tap into it to balance the budget. State Comptroller Kevin Lembo projects a general fund
By contrast, Malloy started in January 2011 with a bare rainy-day cupboard that predecessor Jodi Rell's administration had depleted.
"He's been given a budget that actually has [surplus revenues] built in," Cure said. "That's more than Malloy got, but that's a one-time event due to changes in the tax law. He's not going to be able to do that long-term."
Lamont also has partisan breathing room in the legislature. The November elections changed the state Senate from an 18-18 split to 24-12 Democratic control, while Democrats widened their lead in the House of Representatives to 90-59 from 80-71, with one disputed Stratford election still before the state Supreme Court.
All four bond-rating agencies downgraded the state late in 2017, citing budget imbalance and high legacy costs.
Moody’s Investors Service rates Connecticut GOs A1, while S&P Global Ratings and Fitch Ratings rate them A and A-plus, respectively. Kroll Bond Ratings Agency assigns its AA-minus rating. Kroll assigns a negative outlook, the others stable.
State Treasurer Denise Nappier said market interest is reviving, citing "material economic progress" that includes the projected FY19 surplus, lower unemployment and a spike in reserves.
“The state still faces considerable fiscal challenges, but the marketplace has recognized that Connecticut is committed to righting its ship by exercising discipline in the management of its fiscal affairs,” said Nappier, who like Malloy did not seek re-election. She will finish her 20th year in office before handing the reins to her successor, Democrat Shawn Wooden, a partner at law firm Day Pitney LLP and a former Hartford City Council president.
While the financial struggles of capital city Hartford made national headlines over the past year — the state and city agreed to a "contract assistance" bailout deal that included Connecticut assuming roughly $550 million of city debt over 20 to 30 years — other big cities including New Haven, Bridgeport, Waterbury and New Britain are hurting to varying degrees.
Though S&P last month reaffirmed New Britain's A-plus rating — the city five years ago was at BBB — Mayor Erin Stewart said her city still must strike a "delicate balance" fiscally.
"We have to be mindful of what we are spending versus what we are taking in, and be mindful of what's coming down the road," she said.
"While you're reading all these great articles about New Britain doesn't mean our heads are necessarily above water. We're still paddling on, but at any moment the water could go in over our heads."
Stewart, an unsuccessful Republican candidate for lieutenant governor and the only GOP member of Lamont's transitional advisory team, said the Hartford deal "created a lot of animosity among the city mayors" and rankled people statewide.
"Do you let your capital city go bankrupt or save it? But now the likes of Mayor [Joe] Ganim in Bridgeport and Mayor [Toni] Harp in New Haven — and I'm in that category, too — are saying 'hey, where's my piece of the pie?'" Stewart said.
"Connecticut has 169 fiefdoms," she said of the state's municipalities. "The further away you were from Hartford, the less they were concerned about the capital city going under. They said 'I don't want my tax dollars to pay for a Hartford bailout,' no matter what I said to people."
The politically prickly matter of tolling highways within the state is bound to resurface. Connecticut removed them from its turnpike system in 1985. Though Lamont campaigned on the theme of tolling trucks only — the industry sued neighboring Rhode Island over such a move — his transitional policy team is pushing for a broader tolling reach.
High debt and legacy costs including pension and other post-employment liability still dog Connecticut. The state earned a D grade in legacy-cost management for the third straight year from the think tank Volcker Alliance.
Connecticut, according to Volcker, exemplifies states that now make 100% of their actuarially determined annual pension payments but are still less than 70% funded because of past contribution shortfalls, market losses, or both. On an annual basis, said Volcker, its pension fund contributions were 98.3% of the ADC in 2017, but its pension funding level was only 43.8%.
The state's Pension Sustainability Commission, which began meeting in July, expects to continue its work at least through January, said its chairman, Rep. Jonathan Steinberg, D-Westport. "We are at the end game," he said at the group's December meeting.
Recommendations from the panel could include dedicating lottery receipts to the state's pension funds to asset transfers through the establishment of a legacy obligation trust.
"Asset transfers can be more about achieving optical and budgetary benefits than improving the fiscal health of the pension systems," Municipal Market Analytics said in a commentary. "Contributing assets that are not liquid or come with restrictions or prohibitions on converting such to cash may prove to be detrimental to the pension fund because the reduced state contributions [cash] could force greater negative cash flows in an already fiscally strained plan."
