Despite huge surplus projections and unprecedented state budget reserves, the financial future is scary for public colleges and universities, social service providers, and municipalities.
That’s because legislators next year face one of the largest budget gaps since Gov. Ned Lamont first took office in 2019, when they raised taxes by more than $200 million per year.
While those big surpluses and reserves make tax hikes in 2025 extremely unlikely, it’s unclear whether officials will smash the piggy bank to rescue core services, which are being propped up for now with hundreds of millions of temporary dollars.
“I have to remind people that ARPA is one-time money and ARPA does not go on forever,” Gov. Ned Lamont said on May 9, two days after he and legislators agreed to dedicate the final $370 million in temporary federal American Rescue Plan Act pandemic relief that Connecticut received from Congress to support state programs in the upcoming fiscal year.
Officials previously had designated nearly $140 million more in ARPA to 2024-25, bringing the grant total to $510 million, according to state fiscal analysts.
The governor and legislators also had assigned $74 million from last fiscal year’s surplus and another $110 million from this year to balance the books in 2024-25.
All told, more than $693 million in temporary money props up the next budget — and then goes away.
Lamont and his fellow Democrats in the legislature’s majority took this option because they couldn’t agree whether to cut spending or scale back huge savings programs the state has employed since late 2017 to help build budget reserves and pay off debt.
But that also complicates matters, because most of that temporary funding goes to meet ongoing costs.
Between surplus dollars and ARPA, about $310 million of it will be shared among the University of Connecticut and regional state universities and community colleges. Higher ed officials have insisted repeatedly in recent months they need those dollars to cover recurring operating costs and are expected next year to ask legislators to replace that temporary aid with ongoing support.
“For CSCU to be a part of Connecticut’s growth strategy, we need predictable, sustainable and appropriate levels of funding so we can continue to provide a high-quality and affordable education to our students,” system spokeswoman Samantha Norton said Wednesday. “We look forward to continuing to work with state leaders, legislators and the governor’s office on creating a roadmap for how we can better invest in our students’ futures.”
Another $50 million went to the private nonprofit agencies that deliver the bulk of state-sponsored social services to people with disabilities and clients struggling with addiction or mental illness. The CT Community Nonprofit Alliance estimates the industry loses $480 million annually due to state rates not keeping pace with inflation since 2007.
“The needs of the people that nonprofits serve are ongoing,” said alliance CEO Gian-Carl Casa, who said social service agencies likely would use temporary dollars to cover wages, pay rent and insurance bills and cover other recurring costs. “They repeat and they grow every year.”
Another $44 million in one-time dollars is earmarked for children’s mental health programs and child care services, two other areas that advocates insist need ongoing funding increases to meet growing demand.
Legislators assigned ARPA funds to cover numerous smaller programs in home districts, but they also ordered almost $40 million in unqualified aid to a dozen cities and towns.
Joe DeLong, executive director of the Connecticut Conference of Municipalities, said his organization has encouraged communities whenever possible to use pandemic relief grants to cover one-time costs.
But cities and towns have complained for decades that municipalities receive too little state aid relative to the large number of services that state law requires them to provide.
How can the state officials insist that communities use temporary aid for one-time costs, DeLong asked. “It’s hard for the state to make that assumption of local governments if they’re not doing that themselves.”
Legislature next year will likely face more than $1B in budget challenges
Unfortunately for state officials next year, dealing with expired federal aid and surplus dollars isn’t the only challenge.
State analysts say fixed costs — expenses that can’t be avoided easily — will grow by more than $300 million between 2024-25 and 2025-26. This involves contractually required contributions to pensions and retiree health care programs, payments on bonded debt and caseload growth in Medicaid and other entitlement programs.
That pushes the potential gap officials must solve once the next regular legislative session begins next January to $1 billion.
And that figure doesn’t include state employee wage hikes, which must be renegotiated this winter, inflationary cost increases across all agencies, or new program expansions mandated by law.
Legislators can and have withheld inflationary increases, and program expansions sometimes are canceled before they even start. But raises are subject to negotiations with unions.
And as state revenues have surged in recent years, workers have received healthy increases. General wage and step hikes worth roughly 4.5% per year have been approved since 2022.
Those raises added about $120 million in costs directly to the state budget for 2024-25 and tens of millions of dollars in additional costs to public colleges and universities.
The $1 billion-plus challenge facing lawmakers next year is one of the largest since January 2019, when Lamont took office and analysts were saying the 2019-20 budget would run nearly $2 billion in the red unless adjusted.
Lamont and the legislature resolved the problem by trimming some programs, refinancing pensions to shift costs plus interest onto future taxpayers, canceling roughly $650 million in previously approved tax relief and ordering tax hikes worth about $270 million annually by 2022.
They created a 1% surcharge on prepared meals and a 10-cent fee on plastic bags, broadened what is subject to the 6.35% sales tax and reduced a business tax credit, but they avoided increasing the state income tax.
Legislators must decide whether to scale back savings program
But options were limited then because the 2010s were marked by frequent budget deficits, limited budget reserves and two of the largest tax hikes in state history — ordered in 2011 and 2015.
The state now holds a record-setting $3.3 billion its rainy day fund, an amount equal to roughly 15% of the General Fund. That doesn’t include the $1.3 billion surplus analysts are projecting for the current fiscal year, which ends June 30.
In addition, analysts say, a program that forces legislators to save a portion of volatile income and business tax receipts will capture $1.2 billion next fiscal year and $910 million in 2025-26.
But legislators can’t easily spend those dollars. State budget controls established in 2017 say those volatile revenues must be used to build reserves or to pay down Connecticut’s considerable pension debt.
More than $7.7 billion in surplus dollars have been channeled into pensions since 2020. But Connecticut entered this year with more than $37 billion in unfunded obligations — a massive problem stemming from seven decades of poor savings between the late 1930s and 2010.
Those savings rules could be changed but only if the governor and 60% of both the House and Senate agree.
Lamont has argued against scaling back those savings programs, and Republicans in the legislature agree.
“If we get back to that practice … of not being responsible in managing the payments on super-sized debt,” said Sen. Eric Berthel of Watertown, ranking GOP senator on the Appropriations Committee, “it snowballs into something much bigger.”
House Minority Leader Vincent J. Candelora, R-North Branford, said that while Lamont talked tough about ARPA, he allowed his fellow Democrats to give temporary aid to groups planning to use it to cover ongoing costs.
“The governor didn’t stick to his guns,” Candelora said, adding it only will be harder next year to get these same groups to accept spending cuts. “He blessed this document.”
Lamont’s budget spokesman, Chris Collibee, said Wednesday that “the administration has been clear with all stakeholders that one-time revenue should be used only for one-time expenditures, and there should be no expectation on the part of anyone that the state will pick up expiring ARPA funds” in the next budget debate.
Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee, said she believes most legislators respect the fiscal controls that have stabilized finances in recent years. But they also don’t want to see core programs gutted and priority given only to paying down pension debt.
Osten recalled many painful cuts ordered to already depleted education, health care and social services during the 2010 session, when legislators were trying to mitigate deficits and spare taxpayers more increases.
“I don’t want to get into a place,” she added, “where we’re trying to scrape the bottom of the barrel.”