The Lamont administration threw cold water Wednesday on legislators’ hopes that the state would pump more dollars next year into education, social services, child care and other core programs.
Medicaid, debt payments and other fixed costs are rising just as fast as the revenues legislators are allowed to spend in the fiscal year that begins July 1, according to a state budget report released Wednesday.
Meanwhile, an aggressive saving program expected to dramatically grow in the next budget cycle will barely miss a beat. After blocking legislators from spending $1.4 billion in income and business tax receipts this fiscal year, the program will capture almost $1.3 billion in each of the next two.
“Expenditure growth in areas of the budget that are not considered ‘fixed’ will continue to drive the need to prioritize resources in the short-term,” Gov. Ned Lamont’s budget director, Office of Policy and Management Secretary Jeffrey Beckham, wrote in his annual Fiscal Accountability Report.
The accountability report is an omnibus analysis of spending, revenue, borrowing and other fiscal trends prepared for the legislature’s Appropriations and Finance, Revenue and Bonding committees.
The report focuses largely on certain “fixed” costs that legislators have little ability to adjust due to contractual obligations or federal requirements. These include: contributions to public-sector pension funds and other retirement benefit programs, payments to hospitals and to bondholders, various health care programs for low-income residents run through the federal Medicaid program, and funding tied to legal claims.
These costs will grow $503.1 million next fiscal year, which outpaces the nearly $500 million in revenue growth both the administration and the legislature’s nonpartisan Office of Fiscal Analysis anticipate for 2025-26.
The situation doesn’t get much better in 2026-27, but revenues then are expected to grow $692 million while fixed costs will jump about $530 million, according to Beckham’s report.
Medicaid, which is beset with $220 million in projected cost overruns this fiscal year, will need at least another $167 million more in 2025-26, and then $154 million on top of that in 2026-27, the administration estimates.
Health care benefits for retired state workers are another big cost driver, requiring $175 million extra in the first year of the next budget cycle, and another $154 million in the second.
And required payments into the pension for municipal teachers jump $54 million next fiscal year and then another $50 million in 2026-27.
Increased income tax receipts tied to paycheck withholding and a modest bump in sales tax revenues would be enough to cover most growth in fixed costs.
But there are other unavoidable challenges facing the next two-year budget that, technically, aren’t labeled as “fixed.”
Legislators don’t direct staff to assess state employee salaries in the accountability report — but Lamont must negotiate new wage agreements this winter with all major state employee unions, involving more than 45,000 workers.
Since 2021-22, most state employees, annually, have received a 2.5% general wage hike and a step increase — which typically adds another 2 percentage points to the raise. Nonpartisan analysts say this will cost the General Fund about $121 million this fiscal year.
Those raises also drove about $70 million in additional annual costs for public colleges and universities, because some of their staff are funded through tuition revenues or research grants, rather than out of the block grant provided in the state budget.
Still, in recent years, lawmakers have covered the cost of these raises in the state budget — and higher education officials are expected to ask them to do so again next spring.
That means “fixed costs” and likely raises will consume all or most of projected revenue growth in each of the next two fiscal years.
That’s a big problem because leaders of the legislature’s Democratic majority have a big to-do list of additional appropriations they want to address.
Public colleges and universities are being supported this fiscal year by more than $300 million in temporary funds — surpluses from previous state budgets and expiring, emergency federal pandemic grants.
The systems, which already have imposed significant tuition and fee hikes in recent years, have said they will need legislators to replace most of or all those funds in each year of the next biennium.
Municipal K-12 districts also have been buffered in recent years by federal pandemic grants that are soon to expire.
Nonprofit social service agencies that deliver the bulk of state services to people with disabilities, mental illness or addiction, estimate they are losing more than $450 million annually because state payments haven’t kept pace with inflation since the mid-2000s.
And many legislators say Connecticut’s child care industry still hasn’t recovered fully from the economic shocks of the 2020 pandemic.
Further complicating matters, progressive policy groups and many legislators are pushing for Connecticut to establish a new state income tax credit for low- and middle-income families. One proposal would provide $600 per child, up to $1,800 per family, but would cost the state an estimated $300 million per year in revenue.
And while the administration’s projections show there’s no room to accommodate any of those priorities, that’s assuming Connecticut continues to ignore a huge pile of cash just outside of the state budget.
Since 2017, legislators have tied their own hands, establishing a program that forces them to save a portion of income and business tax receipts, much of which is tied to capital gains, dividends and other investment earnings.
These revenues, historically, fluctuate significantly from year to year and a program dubbed the “volatility adjustment” has blocked lawmakers from spending an average of $1.4 billion annually since 2017. That’s equal to more than 6% of this year’s General Fund.
Critics say the program is flawed. Rather than capturing large amounts some years and little or none in others, it has never failed to take at least $530 million out of legislators’ hands.
Since 2017, the state has boosted a meager, $212 million rainy day fund — smaller than 1% of the General Fund at that time — to a record-setting $4.1 billion, which represents the legal maximum budget reserve, or 18%.
Over the same period, another $8.5 billion in surpluses has been used to whittle down Connecticut’s considerable pension debt.
A massive problem caused by inadequate savings between 1939 and 2010, the pension debt still exceeded $35 billion entering this fiscal year. Connecticut isn’t projected to resolve all its unfunded pension liabilities until the late 2040s or early 2050s.
As recently as January, state fiscal analysts had projected revenues in the “volatile” category would slow down and the program would capture a more modest $450 million-to-$490 million annually through 2028.
But now they say that program will grab $1.4 billion this year and about $1.3 billion annually through 2028.
Senate President Pro Tem Martin M. Looney, D-New Haven, House Speaker Matt Ritter, D-Hartford, and the Democratic leaders of the Appropriations Committee all have said that savings program needs to be scaled back.
Connecticut can balance its budget, invest more in core programs and still achieve healthy surpluses that continue to accelerate paying down pension debt.
“There’s a compromise here that’s easy to strike,” Ritter said last week. “Everybody come to the table and let’s figure it out.”
Republican legislative leaders have opposed any change in the budget controls, arguing that Democrat-controlled legislatures have a history of over-spending that goes back decades. Connecticut could have been facing even tougher choices in the next session, they said Wednesday.
“If it weren’t for the common-sense fiscal guardrails that Republicans pushed in 2017, Connecticut would be in a significant financial hole,” Senate Minority Leader Stephen Harding of Brookfield wrote in a joint statement with the ranking Senate Republicans on the appropriations and finance panels, Eric Berthel of Watertown and Henri Martin of Bristol.
Lamont also has been reluctant to slow down savings efforts. And his budget office projected in its accountability report that if Connecticut were to experience another recession soon, like the economic downturns that hit the nation in 2002 and late 2007, that big savings would disappear fast.
In that event, the report states, Connecticut could expect to see annual revenues shrink between $5.5 billion and $7.6 billion.
No revenue would be captured in the savings program and the $4.1 billion rainy day fund would be greatly reduced or depleted entirely within two years.