By using nearly $8 billion in budget surpluses to shrink pension debt, state officials addressed a longstanding problem that had weakened education, health care and other core services for decades.
State Treasurer Erick Russell and Gov. Ned Lamont now hope to do something similar — albeit on a smaller scale — with Connecticut’s transportation program.
Rather than attacking unfunded pension obligations, this plan would erase hundreds of millions of dollars in bonded debt, the principal and interest on highway, bridge, and rail projects. The goal ultimately is to save about $70 million in annual debt service payments and use that savings to accelerate the rebuild of Connecticut’s aging transportation infrastructure.
But for the initiative to be completely successful, the Department of Transportation needs to overcome a second hurdle: pushing Connecticut’s construction program to record highs.
“The goal here is to actually maximize the opportunity for savings,” Russell told The Connecticut Mirror, adding it’s designed to produce benefits for many years to come. “We’re doing so in a way that is about getting long-term benefits.”
CT transportation fund has amassed huge surplus
The treasurer, who first brought the plan to the Lamont administration for inclusion in the governor’s proposed budget adjustments for 2024-25, is focused on the $2.15 billion Special Transportation Fund that represents 8.5% of the overall $25.1 billion state budget.
The fund, which has been running well in the black in recent years, covers the operating costs for the departments of transportation and motor vehicles. But about 40% of the fund, more than $867 million this fiscal year, will cover principal and interest payments on the hundreds of millions of dollars Connecticut borrows annually — and then matches with federal grants — to fuel its transportation capital program.
Lamont’s budget office projects the STF to close this fiscal year with a surplus of $240 million, or 11%. Last year, it closed 15% or $277 million in the black — and that was despite a 13-month gasoline tax holiday that saved motorists about $330 million. Most of that, $240 million, occurred during the 2022-23 fiscal year.
The Special Transportation Fund reserve, the account that holds these surpluses, is projected to approach $920 million by June 30, equal to almost 43% of this year’s STF.
That enormous reserve already has prompted calls from gasoline station owners, anti-tolling advocates and Republican legislators for reductions in fuel taxes or repeal of the highway mileage tax on commercial trucks.
Russell’s plan would cut that huge reserve by 55% right away, using slightly more than $500 million in unused funds to shave down Connecticut’s outstanding transportation debt, which exceeds $7.4 billion. Most of that debt was borrowed at 5%, though some of the notes are marked at 3% to 4%, the treasurer said.
The plan also would cap that reserve fund balance at 18% of the STF, or about $386 million. Any future surpluses, whenever the reserve is full, also would be used to retire transportation debt early.
Legislators from both parties quickly praised the plan, which is expected to be part of whatever budget adjustments Lamont and legislators make this spring to 2024-25 state finances.
Its popularity may stem from its similarity to how Connecticut dealt with the rising mandatory pension contribution that dominated budgets in the first two decades of the 2000s, leeching resources away from many other programs.
Now that Connecticut has funneled $7.7 billion in surpluses into its pensions since 2020, required contributions will rise about just $50 million next fiscal year.
They otherwise would have grown closer to $700 million.
Similarly, Russell and Lamont’s staffs estimate the early retirement of more than $500 million in transportation funds will slow the growth of the STF debt service line item by about $60 million within two years. And the savings could reach $75 million by 2028, keeping the transportation fund solvent at least through that year as well.
When Connecticut began to chop into its pension debt, Wall Street credit rating agencies responded with improved grades for state bond offerings that led to lower interest rates.
“I think this [transportation bond pay-down] will be very well received from the rating agencies,” Russell added. “This is another example of us implementing sound fiscal policy.”
“For the first time in a generation, the state of Connecticut is not lurching from one financial crisis to the next,” the Lamont administration wrote in its budget introduction. “The state’s financial position is stable, and, unlike other states, we are not facing deficits that would result in deep cuts in spending or substantial increases in taxes.”
Lamont administration challenges itself to do more projects
But paying down debt and achieving savings in the STF is not the only challenge Connecticut faces.
Cars and trucks struggle daily to navigate an agency system of highways and bridges, much of which was constructed in the 1950s.
And while transportation fund revenues and fund balances have swelled, critics say construction work has not grown as swiftly. If Connecticut saves $60 million to $75 million annually in a transportation fund that’s already achieving big surpluses, they added, the state must leverage those resources to ensure hundreds of millions of additional dollars are invested in projects each year.
The state borrowed an average of $725 million for transportation from 2015 through 2018 under Malloy, according to debt reports from the state treasurer’s office, pairing it with about $700 million in yearly federal construction grants.
But Lamont has enjoyed far more resources than Malloy did, stemming largely from a surge in sales tax revenues that help fund the STF. Yet borrowing for projects hasn’t grown commensurately.
During Lamont’s first four years, annual average borrowing ticked upward just 2.6%, reaching $744 million — even though STF revenues grew 22% over the same period.
Construction industries and trades alike insist the transportation construction program should be double its current size. And they’re not alone.
A 2015 study prepared by the Malloy administration, “Let’s Go CT!,” recommended the annual capital budget, including state borrowing and federal grants, should exceed $2 billion by 2019 and top $3 billion by 2021.
But Malloy’s benchmarks hinged on Connecticut establishing electronic tolls on its highways. And when lawmakers rejected tolling proposals from Lamont in 2019 and in 2020, the administration had to modify its goals.
Still, construction advocates say Connecticut should have been well over the $2 billion per year mark, even without tolls, given its other resources. And with $60 million to $75 million in savings, they add, the state has the flexibility to issue more bonds — and cover more debt service payments — without increasing the sales and fuel taxes that support the transportation fund.
The Lamont administration has ramped up borrowing somewhat in the governor’s second term but still hasn’t hit its own targets.
In a November 2021 report, the administration aimed for $1.2 billion in state transportation borrowing by 2022-23. The state actually borrowed $830 million.
It projected a $1 million investment this year, then adjusted to $875 million.
But Department of Transportation Commission Garrett Eucalitto, who inherited these challenges when Lamont tapped him to run the agency about one year ago, feels the transportation program has turned the corner.
Enhanced federal funding, stemming from the $1.2 trillion infrastructure bill President Joe Biden signed in 2021, should send $1.1 billion to Connecticut this year. Combined with the $875 million in state borrowing, overall funding for the capital program is already at nearly $2 billion. And the agency is well aware of the need to take full advantage of generous federal funding.
“We’re pumping out as much work as we can do,” he told the CT Mirror last week, adding that while some strategic work to reduce congestion may progress more slowly, projects needed to preserve safety haven’t been delayed. “The infrastructure is not degrading as a result of our inability to get more work out the door.”
Still, the administration is projecting $1 billion in state borrowing next fiscal year and $1.1 billion the year after that.
Governors and legislators have puzzled for nearly 15 years about how to ramp up projects. A 2010 legislative investigative panel concluded that staffing and other challenges left the DOT struggling to complete projects on time and under budget.
As recently as 2022, the department had fewer authorized full-time positions than the 3,398 it had in 2010, according to state budget records. And while authorized full-time positions now are 3,567, or 269 higher than 2010 levels, a nearly 11% vacancy rate has left just 3,189 filled.
“I’m not going to pretend that our staffing challenges haven’t held back some of our project development,” Eucalitto said.
Still, the commissioner says expanding the capital program over the next two years is a realistic goal.
The administration already has begun trying to counter a huge surge in state employee retirements that occurred two years ago when pension benefits rules changed. It’s cut a 24% vacancy rate among engineers nearly in half.
“We have made significant progress over the last few years,” he said, adding that many states have struggled to retain transportation engineers in the face of strong competition from private sector wages.
As several major projects wind down over the next year in neighboring New York, including the Tappan Zee Bridge replacement, Connecticut transportation officials are already making plans to accelerate projects here.
“I think the construction industry could absorb more work, and I think we’re going to get there,” Eucalitto said, adding that he remains confident officials will give his department the resources it needs. “Both this administration and the legislature have never said ‘no’ to us yet.”