Opening Keynote

Treasurer Russell will provide an in-depth look at Connecticut's financial standing including recent progress stabilizing the state's budget and reducing long-term liabilities. He will also present a vision for Connecticut's future that capitalizes on this recent success, the sustained impact of reforms to budgetary and investment practices, and the potential of the state's first-in-the-nation Baby Bonds program.

Transcription:

Erick Russell (00:07):

So good morning everyone. It's great to be here with you today. Just wanted to start by saying thank you to Natasha for the very kind introduction and to the Bond Buyer for the invitation to join you all here today. It really is an honor to be here in the room with so many friends and folks that I've had the pleasure of being able to work with both in my prior role and in current capacity in my first year estate treasurer. A somewhat unexpected joy for me has come from hearing from experts from all over the country with differing roles throughout government or finance as they talk about the work they do with passion and purpose. Everyone has slightly different approaches to their work with different objectives, but I'm struck by the commonalities that make people and organizations successful. Whether it's creativity to think about a problem in a new way or a commitment to improve an existing process or program, or it's fostering a culture that empowers colleagues through collaboration and mutual reliance.

(01:19)

There is always something that I've learned through these experiences and that I like to take back to my own work. It's all about the big picture and thinking about what we want the future of our state and of our work to look like. My role is pretty expansive and I know Natasha touched on some of the roles and responsibilities of my office, but in addition to the bonding and infrastructure investment and financing that you are all very familiar with, my agency oversees and administers 50 billion in pension assets for state employees and teachers and retirees in our state. We handle all of the state's cash and work to get unclaimed property back to their rightful owners. We help families save for education and so much more, but having worked with the agency as a bond attorney for years prior to running for treasurer, I knew what I was getting myself into in many ways, but the work is ever changing and day by day I've been surprised.

(02:23)

It's been a surprise even to me about how much we are able to get accomplished and how much work is actually done through the office. It's exciting and very rewarding. It is certainly challenging at times, but it's never boring and I've thoroughly enjoyed it in an office with such a broad subject matter what unites us as a common commitment to public service. I've prioritized building a team around me that works well together and that takes pride in our shared success. Great organizations have great culture and that's what we're striving to build in the office of the treasurer in Connecticut. I want people to be proud of the work they do. I want them to enjoy stepping through the doors each morning. I want them to feel appreciated and supported and I want them to view themselves as a piece of the big picture. As we work to accomplish our goals together, we all have a role to play.

(03:18)

Myself included, we've had some immediate successes this year since I was sworn in, but more importantly, we're building the office for long-term success. Zooming out the treasurer's office itself fits into a similar spot within the whole of state government. We have a big role to play in strengthening the state's fiscal position and building a more vibrant economy, but we truly accomplish those things. To accomplish those things we need to coalesce around our goals and shared commitment to make them a reality. Fortunately, Connecticut has made that commitment and much like within my office, we're seeing both immediate and long-term successes and benefits. For decades, Connecticut's government operated with consistent short-sightedness policymakers neglected our their obligations failing to adequately contribute to our pension funds, resulting in rising and unfunded liabilities and eventually ballooning debt. Following the Great Recession, Connecticut was constantly rolling upstream against cycles of budget deficits.

(04:28)

While reforms were put in place to finally address the state's annual responsibility to fund pensions, fixed costs continued to take up an outsized percentage of state expenses. In addition, the state's population was declining and the departure of several noteworthy companies added to an overall souring of confidence in the state's economy. To navigate this persistent crisis, lawmakers slashed essential services raised taxes, received significant concessions from labor and depleted the rainy day fund. Quite frankly, the state was at an inflection point In 2017, another round of brutal and contentious budget negotiations dragged on for months. At the end, a series of budgetary reforms were enacted to constrain state spending, rebuild reserves and tame volatile revenues that had complicated work for appropriators in the state. Those reforms known colloquially as our fiscal guardrails weren't necessarily expected to produce immediate short-term benefits, but they were noteworthy in and of themselves because they showed a unified bipartisan commitment to finally address many of the state's chronic fiscal issues.

(05:44)

Different lawmakers supported them for different reasons. The boom and bust cycles that had led to that point had made life difficult for everyone in our state. Many legislators were eager to project stability to the community and prevent further tax increases. Others prioritize protecting funding for social service programs at a time when working families were struggling immensely regardless of their motivation. The result was a shared ownership of the policies and a shared vested interest in them being successful. In the years that followed, the guardrails worked to degrees no one really anticipated. By capturing volatile revenue, we filled our rainy date fund to capacity, which was at about $200 million, which is 1% of our general fund to $3.3 billion. Today paired with record high budget surpluses, nearly $8 billion in additional contributions were made to our pension funds, and that's on top of our annually required contributions, which Connecticut has been making each year.

(06:50)

In stark contrast to the negligence that we saw for many decades prior and this January, a very significant tax cut took effect in the state of Connecticut. Beyond any one measure of success of the guardrails themselves, a shared sense of accomplishment has brought about a new culture of fiscal responsibility within state government. One that I'm incredibly proud of to play a role in as treasurer by addressing the structural issues that have become an anchor around the state's economy. Connecticut can now make decisions about its future from a position of strength. Like any state, we're not immune from challenges. I have no illusions of that, but there are so many more reasons for us to be hopeful moving forward. We've fully recovered all of our pandemic job losses. The state added twenty six thousand eight hundred and two thousand and twenty two and 22,700 jobs in 2023, the highest two year job growth since 1999. Connecticut's per capita income outpaces both the region and the nation generating economic opportunity, though not equally distributed.

(08:04)

We have taken definitive steps to close our state's wealth gap through innovative public policy, some of which I'll speak to in a little bit, and we continue to have population growth even as several of our neighboring states have experienced net out migration as our population grows, so as our reputation as a destination, particularly during the pandemic when many nearby here in New York or in Boston or in neighboring major cities sought more elbow room and lower taxes. We are home to a diverse mix of Fortune 500 companies, including defense, insurance, telecommunications, transportation, and biomedicine. We're also rated amongst the best states to work remotely.

(08:55)

That's in large part because of our quality of life, it being very strong, especially for young families. We have outstanding schools including some of the best universities in the country, producing highly educated workforce that largely stays in state after graduation, and we have top ranked healthcare institutions, robust healthcare sector, and among the healthiest populations in the nation, we have beaches and mountains, hiking trails and high-tech laboratories, quiet towns and rising cities, colonial history and community values. Of course, championship basketball at Yukon and championship hockey at Quinnipiac, and we have the best pizza in the country. I'm a New Haven guy. If you know, as you probably noticed, after years of being held up as a poster child for fiscal irresponsibility, we're also working to rebuild our civic pride. Great organizations have great culture, and the same is true for great states. We want every resident to be proud of their community and to feel well-served by their government, getting our fiscal house in order has earned the state more trust from our residents, and they're starting to feel the benefits through everyday public policy.

(10:16)

Now, I figure being at the bonfire conference, I could get a little wonky on the bond side of things, but since March of 2021, Connecticut's general obligation, our special tax obligation, which is our special transportation fund and Yukon General obligation bonds have all received multiple upgrades from the four major rating agencies. Without fail rating agencies have cited Connecticut's improved fiscal position and our commitment to budgetary discipline as an overwhelming point in our favor for taxpayers. The result has been lower borrowing costs, freeing up resources for other critical investments in our state since this is again, the only crowd that I can really talk about this without getting a deer in the headlights look, I'll mention Connecticut's shrinking bond spreads quick. So we tracked the spread on the MMD index on the 20 year bond for GEO bonds for GEO bond sales in March of 2018.

(11:23)

That spread was 96 basis points, and our bond rating was single A by our December, 2023 sale. The spread had shrunk down to 22 basis points, and that's now with us solidly in the AA category. In addition, there's significant and growing investor interest in Connecticut. Last year, governor Ned Lamont and I hosted the state's inaugural investor conference. Many of you were among the 300 plus investment professionals who traveled to Connecticut. To hear about our ongoing and upcoming bond initiatives, we wanted to demonstrate that there were many exciting opportunities to invest in our state, but also how all of our bond programs work together combined, they demonstrate a vision for the future that capitalizes on our strengths, strategically targets areas for growth and makes us more resilient to climate change, infrastructure aging, and global economic turmoil. Connecticut was one of the early issuers of green bonds for our state revolving fund clean water and drinking water program, and offered our first green bond in 2014.

(12:34)

In 2021, we used our first social bond for the benefit of the state's K through 12 school systems. Unlike many states, school construction costs in Connecticut are generally financed through both local funding and state reimbursements. Under a prioritization formula set by state law, school construction in disadvantaged municipalities is eligible for a higher rate of reimbursement than in wealthier towns, resulting in a socially progressive program and earning the social bond designation. Our December GEO bond sale included two more social bond issues, which continue to be of interest to ESG investors and funds, and to date, we've issued nearly 1.5 billion in social bonds. Total Connecticut's recent commitment to sound budgeting and our success so far is making it less expensive to take on projects that we would need to do regardless, and it's making it easier for us to live up to our obligation to residents and to govern according to our common values so that the same holds true for our pension funds, and this has obviously been a big anchor for the state for many years. In the past, the unwillingness to properly contribute to our pension funds tanked our funded ratios and created crushing debt, and that underfunding also constrained performance of the investments that we had within our funds, creating even more missed opportunities. When I took office analyzing those shortcomings and making corrections was my top priority.

(14:13)

I'm sorry, a study from the Yale School of Management sent shockwaves through Connecticut politics soon after I began my term. It looked back at prior decades of investment performance and attempted to quantify the missed opportunity there showing the direct impact performance can have for taxpayers. It also pointed out suggestions for reform, all of which we had either already implemented or which were well underway. After I became treasurer, the biggest area we needed to address was our asset allocation, and so how our investments are spread between the portfolio in each asset class accounts for over 90% of our performance. Without getting too in the weeds, our asset mix was simply out of whack. We were overweight in emerging markets, we were underweight in US equities and private markets, and we just weren't set up for long-term success. The agency worked with our investment advisory council, which is the oversight board that we work very closely with to revamp our asset allocation strategy and implement that.

(15:20)

We have now a five-year pacing plan as we move toward that new target allocation. The key commonality though with top performing public pension funds is consistent leadership. Connecticut experienced extraordinarily high turnover once going through a 12 year window where we had 10 chief investment officers. As you can imagine, it is hard to set long-term investment strategy when there is constant turnover at the top, and it also makes it a lot more challenging to retain talent under the chief investment officer, and so we've worked hard to implement new policies and legislation to correct that. We know that we can't compete financially with the private sector, but for a long time, Connecticut served as a feeder system for other public pension funds. We're now making sure that we can attract and retain top tier investment talent as we move forward and we're long-term investors. I think this is always key, especially explaining to constituents in the state.

(16:29)

We don't measure our success by any one year or even two year window of time, but we're starting to see the benefits of a lot of these reforms pay off. In fiscal year 2023, we performed at 8.5% across our portfolio. Our benchmark, essentially how our asset allocation would've performed in a neutral environment without active management was at 5.9% and according to pensions and investments, which tracks performance for 68 public pension funds across the country, we were the largest outperformer of our benchmark across the country. Over the calendar year, we're performing at 12.9%, but I think again, the key here is that these changes and reforms that are being put in place are setting us up for long-term success. Much in the same way Connecticut's fiscal discipline and growing strength has impacted the cost of borrowing. The commitment to paying down pension debt is producing immediate budget savings as well.

(17:34)

Our required contributions now are over $600 million less per year than they were prior to those additional contributions. That's money that we can now use to address different budgetary priorities that can improve the lives of our or make long-term investments on their behalf. Our guardrails haven't eliminated the need to make hard budgetary decisions. That will always be the case, but we can now have debates about how we make those decisions without the specter of crisis hanging over our heads and the use and use the success is gained from the work to our advantage. One of those specific initiatives that I'm incredibly proud of, we got accomplished in our first year, and so starting on July 1st, 2023, every child born into poverty in Connecticut will have $3,200 invested in a trust on their behalf, which will grow over the life of that child, and when they reach the age when they're between the ages of 18 and 30, they can use those resources for purposes that are all around creating wealth Over time, they can use those resources to purchase a home in Connecticut to start or invest in a Connecticut business to help roll, to help pay for post-secondary education or job training or to roll into a retirement savings account.

(19:12)

Thank you. The concept of Connecticut Baby Bonds was developed by an economist named Dr. Derek Hamilton, and the idea is that we know one of the biggest indicators of someone's ability to build wealth over time is having some access to capital. I think about communities like the one I grew up in where full of hardworking people who went to work every day and paid their rent, and the difference between them being able to have and own something to have an asset that would appreciate over time was having the ability to put a down payment down on a home, and I'm proud of what this says about Connecticut. It takes a lot of political courage for those involved in this initiative to step up and put their neck out on the line for something that's not going to benefit them in the short term. Frankly, I won't be in the office 18 years down the road when the ultimate benefit of this capital is being paid out to children being born in our state now, but what it says is that there's a commitment to our future in a different way that we can't continue to do the same thing and expect the outcome to be different.

(20:22)

Connecticut's one of the wealthiest states in the country, but we also have one of the largest wealth gaps and this program, along with all of the other things we're doing to invest in our future is a commitment to building a future in Connecticut that's more representative of what we want it to look like.

(20:42)

When the program was originally passed in 2021, it called for $600 million of bonding, which was going to be issued $50 million a year for 12 years, and I know that many of you in this room were eager to sell those bonds, I apologize, but the arrangement proved to be a little too contentious for lawmakers and the program was kind of hung out to dry. When I took office, I wanted to take a fresh look at how having conversations around funding the program, governor Lamont was vocal about not wanting to borrow to fund the program, and legislators were in the middle of negotiations and appropriations for the upcoming two year budget. I had months of meetings with stakeholders and everyone involved in trying to reach a solution that allowed us to start the program on time. The answer it turned out was in our improved financial standing in 2019 when Connecticut had restructured its teacher's retirement fund, we created a special reserve fund that was security for bond holders for bonds that had been issued back in 2008, and that cash was set to remain in this special reserve fund for another decade.

(22:00)

My office led by Deputy Treasurer Sarah Sanders, who I know many of you in the room have worked with very closely, began working to replace that reserve fund with a insurance policy. We found that in part because of our fiscal standing and the improvement that we had made, Asurity was sufficient for protecting bond holders. It would be relatively inexpensive for us to issue, and it allowed us to release reserve funds immediately. The governor and the legislature got on board with his concept and a few months later after an RFP process build America Mutual and my office had Asurity in place amongst the largest that's of its kind in the nation and the Connecticut Baby Bond Trust was fully funded together. We celebrated in December at the bond buyer and we were awarded the transaction for innovative financing deal of the year. It was an incredible honor and really a moment to, I think, appreciate the extraordinary collaboration that it took for us to get this over the finish line. The funding solution also allowed us to take nearly $200 million off the top of the program. That Reserve Fund had close to $400 million in it, and because we're investing that over a longer period of time, we were able to get the same benefit that we would have in issuing $600 million in debt over time without the interest and debt service costs that would've been tied to it.

(23:35)

I think the reason this worked, as I talk about the collaboration and just when traveling around the state, it's that there were so many people from different backgrounds that got on board with this program, even though many of them, it was for a variety of different reasons. We had a bipartisan group of mayors and first selectmen and local leaders who supported baby bonds as a way to keep young people in the state and to drive investment in their communities. We saw this particularly in communities that had been under-resourced historically, knowing that children who are benefiting from this program are likely to buy property or start their business in the communities where they live and grew up. We saw Connecticut's business community see baby bonds as a tool to help train skilled workers who may otherwise not have that opportunity for education or training programs necessary for them to participate in the state's economy in a meaningful way.

(24:28)

We saw service providers and nonprofits see baby bonds as an unprecedented opportunities to keep families engaged and connected. Also, understanding that many folks haven't had positive experiences with government and to see a program that's working for them would spark further engagement. Similarly, educators saw baby bonds as a way to help children stay focused on their education knowing that they could have opportunities down the line that they hadn't necessarily seen in cycles in their cycle of generational poverty. But I think big picture baby bonds exemplifies what works best about Connecticut government. Despite our motivations, we coalesced around an idea to help residents responsibly plan for the future and to creatively leverage our now strong fiscal position in that effort beyond any one policy outcome. Baby bonds is a symbol of hope and a proof point that government can do big things in service to our larger obligation to our residents As treasurer, I get to think about the future of Connecticut.

(25:36)

Often that involves long-term financing and investments and big fiscal policy, but it also means I get to think about what kind of state we want to create for our young people in the future. We're trying to shape a future that is equitable and inclusive where everyone participates, where everyone has opportunity, and the closer we come to achieving that, the stronger we'll be as a state. That commitment, that obligation to an unseen future, Connecticut is now part of the culture of state government. Having more power and resources to shape that future is the reward of our painful work we've done to get our fiscal house in order. We're still living with the consequences of decades of bad decisions, but we're on the path to overcoming them and we're committed to never repeating them. Connecticut is better prepared than ever to weather any economic turmoil, even as revenues have softened and many states are struggling to adjust to federal relief drying up, we remain well positioned to withstand any volatility. Connecticut's focused on the big picture I'm of how our collective efforts function as part of a larger effort to shape the economically strong future that Connecticut deserves, and I'm looking forward to continuing that work alongside many of you in this room and the impressive and talented colleagues that I have in the Treasurer's office. And so thank you for having me here today and hope you have a great rest of the conference. Thanks.