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November 21, 2023

Even as surpluses shrink, CT could see balanced budgets for years

HBJ FILE PHOTO The state Capitol with downtown Hartford in the background.

While Connecticut is no longer setting records with its budget surpluses, its massive savings program could keep finances in the black for at least five more years, new reports showed Monday.

Both Gov. Ned Lamont’s budget office and the legislature’s nonpartisan Office of Fiscal Analysis project that revenues will grow much faster than debt payments, pension contributions and other fixed costs that helped sink state finances in the 2010s.

This positive trend — triggered partly by $7.7 billion in surplus transfers to the pension funds since 2020 — is expected to continue at least through 2028, just at a slower pace.

And even if the economy slips, Connecticut could have a rainy day fund approaching $4 billion, its largest fiscal bulwark ever, equal to 17% of the General Fund by next fall.

Budget chief: Lawmakers must control the spending

This “is a good thing, a very good thing,” Lamont’s budget director, Office of Policy and Management Secretary Jeffrey Beckham, said Monday. But he quickly added that the other key to making this a reality is “what you don’t see in this report.”

Unless legislators control costs in non-fixed areas — education, health care, social services, town aid and other core programs — the forecasts don’t hold. “It will be our challenge to make sure that stays within the spending cap,” he said.

The Fiscal Accountability reports, presentations covering a wide array of budgetary trends, are produced annually in mid-November to help lawmakers prepare for the upcoming regular legislative session.

The 2024 General Assembly convenes on Feb. 7.

Lamont, a Greenwich Democrat and fiscal moderate, has been preaching adherence since he took office in 2019 to the spending cap and other fiscal guardrails that, along with a robust stock market, have helped Connecticut achieve record-setting surpluses in recent years.

Of the nearly $11 billion amassed since 2018, about $3 billion had elevated the budget reserve to 15% of the General Fund — until recently, the maximum allowed by law.

Another $7.7 billion was divided into supplemental contributions to the cash-starved pension funds for state employees and municipal teachers, both of which suffered seven decades of inadequate savings and still bear considerable debt.

But because of those extra payments, the fund is projected to make significantly more investment earnings, meaning less than otherwise expected has to come from required annual contributions.

Those mandated payments next year will be about $651 million less than earlier projections because of those deposits from surplus.

That, in turn, has helped control overall growth of legally mandated or “fixed” costs, which also include payments on bonded debt and to the retiree health care program, as well as Medicaid and other entitlement programs.

Required payments on retiree benefits and on bonded debt alone consume nearly 30% of this fiscal year’s General Fund. And cost surges in these areas, coupled with a painful recession and a sluggish recovery, triggered several deficits, three major state tax increases and three union concessions deals between 2009 and 2017.

According to Lamont’s budget office, projected General Fund revenue growth will exceed that in fixed costs by $363 million next fiscal year, when overall state spending is expected to be about $25.1 billion. That trend also is expected to continue from 2026 through 2026, with revenues outpacing fixed costs between $87 million and $388 million yearly.

And legislative analysts projected similar margins in the state’s favor, ranging from $111 million to $371 million in the out-years.

The Office of Fiscal Analysis estimates that this should keep budgets in surplus and the rainy day fund growing. Capped for years at 15% of the General Fund, the reserve’s limit was raised by Lamont and lawmakers to 18% this spring — on the condition that Connecticut keeps using a portion of future surpluses to pay down pension debt.

OFA analysts say the rainy day fund should reach $4 billion by next fall, top $4.1 billion in 2026 and hit the 18% mark — or about $4.3 billion — by 2027.

By comparison, Connecticut had a $1.4 billion reserve equal to 8% of the General Fund when the Great Recession arrived in late 2007. By 2011, the state had exhausted its reserve, run up $1 billion in operating debt and ordered one of the largest tax hikes in history with an estimated value approaching $1.9 billion.

Lamont is expected to have support defending the spending cap and other fiscal guardrails from the legislature’s Republican minority. The more stringent spending cap and new savings programs were adopted as part of a bipartisan budget compromise in 2017.

“We must not deviate from those guardrails. Simply put: the guardrails are working,” Senate Minority Leader Kevin Kelly, R-Stratford, said Monday. “They alone provide the path for Connecticut to climb out of being the highest-taxed state per capita while forcing politicians to set priorities and make tough choices.”

Lamont, lawmakers will be pressed to spend more

But that doesn’t mean all future budget debates will be easy. There are challenges these reports do not or cannot address.

Budget agencies can project only those fixed costs assigned by legislators. And that list doesn’t include a huge chunk of the budget: salaries for Connecticut’s more than 40,000 unionized employees. These are largely are fixed by contracts, yet they have been excluded from the report since 2016, when officials chose to focus largely on controlling debt costs and entitlement programs.

More importantly, critics of the current spending cap and other fiscal guardrails argue they are skewed excessively toward savings and have left the state unable to meet pressing needs in core programs — problems only exacerbated since the coronavirus pandemic’s arrival in 2020.

That means some legislators will join with interest groups in arguing to either legally exceed the spending cap or otherwise work around that system. And all of the projections in Monday’s reports hinge on cap compliance.

The top two leaders in the legislature, Senate President Pro Tem Martin M. Looney, D-New Haven and House Speaker Matt Ritter, D-Hartford, both warned last spring that lawmakers needed some cap flexibility in the coming years to preserve core programs.

The hundreds of community-based nonprofits that deliver the bulk of state sponsored social services have argued for years that Connecticut has prioritized savings and debt reduction over care for those most in need — even though it has enough resources to make strides in both areas.

“Connecticut’s positive budget outlook is an opportunity to invest in the people who depend on social and human services provided by nonprofits,” Gian-Carl Casa, president and CEO of the CT Community Nonprofit Alliance, said Monday. “It’s also compelling evidence that those investments can be sustained.”

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