Having just wrapped its third-successive fiscal year on pace for a budget surplus that tops $1 billion, Connecticut can expect another three years above or near the $1 billion mark — even as federal COVID relief expires.
Thanks to those windfalls and projections, state government’s preparations for the next recession far exceed those of the last one, which left Connecticut in debt and contributed to two of the largest tax hikes in state history.
The legislature’s Office of Fiscal Analysis recently projected the $51.1 billion biennial budget approved by legislators and Gov. Ned Lamont should finish about $1.1 billion in the black this fiscal year, while 2024-25 should end about $995 million on the positive side.
And while global economic factors could change this picture, analysts also say current spending and revenue trends should leave a $1.6 billion cushion between 2025 and 2027, the first two years following the new biennial budget.
That last projection is huge given that by 2027 state government will have exhausted the $2.8 billion in direct relief Congress provided it two years ago through the American Rescue Plan Act, or ARPA.
“Many of us anticipated that when the emergency ARPA money ended we would be looking at a cliff,” said state Senate President Martin M. Looney, D-New Haven. “On the fiscal responsibility side, we’ve done everything we could reasonably do” to prepare for that phase-down and any future economic downturn.
CT budget surpluses projected through 2027
The good news for the latest budget cycle comes in two parts:
- Projected General Fund surpluses of $405 million for 2023-24 and $294 million for 2024-25;
- A forecast that Connecticut will capture an average of $702 million per year across the coming biennium from a special program that forces Connecticut to save a portion of quarterly income and business tax receipts.
While state income tax receipts, which boomed in recent years, have begun to slow down, analysts say sales tax revenues, driven in part by inflation, continue to grow. That, coupled with spending controls, are driving much of the new surplus projections.
Connecticut set a record last summer when it closed the 2021-22 fiscal year with an unprecedented $4.3 billion windfall, equal to nearly one-fifth of the entire General Fund.
Two years ago, the state finished $1.7 billion in the black and the just-completed fiscal year’s cushion is projected at $2 billion. The comptroller’s office won’t official audit those numbers until early September.
Most of those windfalls have been or will be used to whittle down the state’s long-term debt, which remains considerable.
Connecticut entered this year with more than $88 billion in bonded debt and unfunded pension and retiree health care program obligations, making it one of the most indebted states, per capita, in the nation.
But now there’s a chance the state can continue to take big bites out of that debt for years to come, provided another recession doesn’t arrive soon.
Analysts also say spending and revenue trends should leave the state with a $1.1 billion cushion in 2025-26 — the first year after the new biennial budget. That projection includes a $413 million General Fund surplus and $721 million in saved quarterly tax receipts.
And the outlook for 2026-27 includes a $521 million General Fund surplus. Analysts haven’t projected results for the savings program that far into the future.
Democratic and Republican state lawmakers cooperatively created that savings program in 2017, along with stringent new spending and borrowing caps. Those reforms, coupled with a largely robust stock market between 2018 and early 2022, helped end a string of state budget deficits that marked the 2010s and enabled Connecticut to strengthen its short-term fiscal position considerably.
“I think that the caps that were put in place really insulate us against the recession,” said House Minority Leader Vincent J. Candelora, R-North Branford.
That insulation doesn’t get all of the attention it deserves, said House Speaker Matt Ritter, D-Hartford.
While the new state budget expands investments in education, child care and social services, some advocates for those core programs accused legislators and Gov. Ned Lamont of doing too little given government’s recent budgetary windfalls.
Bu Ritter predicted budget critics will be relieved when the next recession arrives, at least in one sense.
The state’s emergency budget reserve — commonly known as the rainy day fund — holds $3.3 billion, equal to 15% of the General Fund, the maximum currently allowed.
That reserve — which lawmakers decided this year can grow to 18% of the General Fund or almost $4 billion by 2025 — will shield programs from cuts when other states are slashing, leaders argued.
“Everybody looks at what we’re not funding,” Ritter added.. “It’s also what we’re not cutting, what we’re not reducing.”
CT is far better prepared for next recession than the last one
And it’s not just core programs and services that are protected.
“Connecticut is well-positioned in the event of an economic downturn to minimize the impacts on taxpayers,” said Chris Collibee, spokesman for Lamont’s budget office. “ … For the first time in recent memory, there are no out-year deficits. This is historically good news for taxpayers.”
Taxpayers didn’t have it so easy after the last recession, before which Connecticut’s preparation wasn’t as good.
In December 2007, when what many economist dubbed ‘The Great Recession’ began nationally — Connecticut wouldn’t feel the pain until early 2009 — the rainy day fund held $1.4 billion. This represented 8.5% of the General Fund, according to the comptroller’s office.
And while state finances are projected to remain in the black through mid-2027, that wasn’t the case back in 2007. Analysts then were warning state finances would dip into the red by 2009.
The Great Recession hit those finances hard.
By the time that downturn concluded in the summer of 2009, legislators and then-Gov. M. Jodi Rell had emptied the reserve to support the next biennial budget.
They also ran up $900 million of operating debt, and had borrowed another $90 million — to cover the first two years of payments on that $900 million obligation.
Stamford Democrat Dannel P. Malloy, who won the 2010 gubernatorial race, would inherit those challenges. In his first year he would sign one of the largest tax hikes in state history, estimated to be worth more than $1.8 billion per year, into law. Another major hike would follow in 2015.
Still, despite all of the advantages the state currently holds, legislative leaders said Connecticut still needs to prepare better. They just don’t agree on what to do next.
Leaders of the House and Senate Democratic majorities say Connecticut must continue a balanced approach, using some of its future surpluses to pay down debt, and another portion to continue bolstering core services, many of which were severely strained during the worst years of the coronavirus pandemic.
Republicans say they also want a balanced approach. But theirs involves attacking debt — and continuing to cut state taxes.
Lamont and lawmakers approved state income tax rate cuts and other changes that will save filers about $500 million per year starting with returns filed in the spring of 2005.
But Candelora and Senate Minority Leader Kevin Kelly, R-Stratford, said lawmakers can strengthen Connecticut’s economy now — by returning even more funds in the next few years to households and to businesses.
“We wanted more tax relief … to give more families more cash in the kitchen table economics,” Kelly said, adding that while government has enjoyed windfalls in recent years, most middle class families here have lost ground to inflation.
This story was originally published by The Connecticut Mirror.