CT’s revenues are finally growing faster than its debt, analysts say
For years, Connecticut’s government finances have been a sinking ship, taking on debt faster than tax revenues would grow to pay it off.
But while uncertainty still looms over the global economy, analysts told legislators Monday the furious fiscal bailing they’ve done in recent years was not in vain.
Connecticut is projected to gain tax receipts faster than its debt grows over the next budget cycle — and the trend may last longer than that.
And while Gov. Ned Lamont’s administration urged lawmakers to remain cautious about state finances, his officials also conceded hundreds of millions of dollars normally earmarked for debt payments could become available yearly — and very soon — for other priorities.
“If you sat through this report in previous years, you would see a lot of red numbers here,” Neil Ayers, who heads the legislature’s nonpartisan Office of Fiscal Analysis, told the Appropriations and Finance committees in a joint hearing Monday.
“It’s very good news. It represents significant progress,” added Office of Policy and Management Secretary Jeffrey Beckham, Lamont’s budget chief.
Starting next fiscal year, revenues covering most areas of the budget will exceed fixed costs by $250 million in the 2023-24 fiscal year, which begins next July 1, nonpartisan analysts said.
Lamont’s budget office, which used a different methodology, said the pendulum doesn’t swing in Connecticut’s favor until 2024-25, but it agreed with legislative analysts that the trend is clear.
By the second year of the next biennial state budget cycle, both offices say revenues could be growing faster than debt obligations, Medicaid and other entitlement programs by more than $400 million. The report does not include contractually obligated wages, among other fixed costs.
And a similar cushion is projected for 2025-26.
In rough terms, $400 million is 2% of the state budget’s General Fund, about half of all the non-education aid sent last fiscal year to cities and towns and more than all revenue from cigarette and tobacco taxes.
The forecasts were part of each office’s Fiscal Accountability Report, an omnibus review of short- and long-term budget financial trends prepared each autumn to help legislators prepare for the governor’s budget proposal, which is customarily delivered in February.
Members of the Appropriations and Finance committees, which reviewed the Fiscal Accountability reports at Monday’s joint hearing, didn’t discuss many details on how the annual savings might be used.
But legislators and Lamont have said in recent years — as Connecticut has moved forward with a strategic plan to attack debt — that dollars previously earmarked for debt reduction then could be used to cut taxes, invest directly in education, health care and economic development, and to share with municipalities.
Officials offered a few hints Monday about their priorities.
Rep. Toni E. Walker, D-New Haven, longtime co-chairwoman of the Appropriations Committee, noted that Connecticut invested heavily — using temporary federal pandemic relief — to help its community colleges and public universities deal with the fiscal chaos caused by the coronavirus outbreak. Those needs won’t go away any time soon, she said.
Higher education “is the way we build our workforce, so we’ve got to make sure that’s sustained,” Walker added.
Sen. John Fonfara, D-Hartford, co-chairman of the Finance Committee and one of the chief architects of a 2017 savings program that helped produce surpluses and reduce debt, has said Connecticut must invest more in early childhood education, particularly if it wants to lift cities out of poverty.
“We don’t talk about how to grow the economy in the legislature very much,” Fonfara said. Tax receipts have been driven upward largely by a swelling stock market, and by oppressive inflation — which often pushes sales tax revenues higher. But Fonfara added that’s not a long-term strategy for growth and can’t be sustained unless Connecticut adds more jobs.
Beckham tried to caution legislators to think more about trimming costs than spending.
Connecticut is projected to finish about $2.8 billion in the black this fiscal year, which would be the second-largest surplus in state history, topped only by last year’s $4.3 billion cushion.
But Beckham noted that Connecticut has used billions of dollars in emergency federal stimulus and state surplus dollars to bolster spending since the pandemic began. That emergency federal aid will have expired by 2025.
And while signs of a recession haven’t hit the state’s coffers yet, “We’re still not even halfway through the fiscal year, so we’re going to keep an eye on that.”
Connecticut’s struggles with debt have been well-documented.
Required payments on bonded debt and unfunded retirement benefit obligations were eating up a whopping 30% of the budget five years ago, prompting officials to refinance pension debt three times between 2017 and 2019. This shifted billions of dollars in obligations, plus interest, onto future generations.
But at the same time, lawmakers also launched a new savings program that limited their ability to spend quarterly income and business tax receipts, particularly those tied to investment earnings. That change, coupled with a sharp reversal in the stock market, sparked unprecedented surpluses.
In five years Connecticut not only has amassed a record-setting $3.3 billion rainy day fund but made $5.8 billion in supplemental pension payments — and could make $2.7 billion more.
Sen. Craig Miner of Litchfield, the ranking Senate Republican on Appropriations, called Monday’s report “probably one of the best fiscal presentations I’ve heard” in years.
But Miner, who is retiring in January, echoed Beckham’s warning and added he’s “rooting” for the Lamont administration to keep the existing savings program locked into place.
Even though Connecticut has lopped more than $7 billion off its long-term unfunded obligations in recent years, it still owes more than $85 billion involving bonded debt and its pension and retirement healthcare programs. And analysts say those will remain a significant burden on state finances well into the 2030s.