With state legislators poised to revisit budget controls that helped eliminate a string of deficits and billions of dollars in debt, Comptroller Sean Scanlon reminded his former colleagues Wednesday that Connecticut isn’t out of the financial woods and urged them to proceed cautiously.
Scanlon, a moderate Democrat, had spoken only of maintaining the controversial system of budget controls prior to this week. But while he didn’t propose any changes himself Wednesday, he did acknowledge that a reform movement is growing and that “there are ways that we can look at the volatility cap” — provided lawmakers don’t undermine a system that has transformed state finances dramatically in a very short time.
Since an aggressive savings program was enacted in 2017, Connecticut has:
Increased a $212 million reserve — a miniscule 1% of the General Fund — into a record-setting $4.1 billion rainy day fund that will shield vital programs from cuts whenever the next recession occurs.
Dedicated another $8.5 billion in surpluses to whittle down Connecticut’s unfunded pension obligations.
Closed every fiscal year in the black since 2016-17, which had been the sixth annual deficit in nine years.
Achieved several upgrades from Wall Street credit rating agencies, moves that help the state maintain and even lower interest costs.
[What are Connecticut’s ‘fiscal guardrails’? We’ve outlined them here]
“All of those are signs of what we’re doing is working,” Scanlon, a state representative prior to becoming comptroller in 2022, said during his annual fall review of the state budget for the prior fiscal year — in this case, 2023-24, which closed June 30.
But despite that progress, “I think that we have certainly not reached a point where anyone — certainly not myself — is going to say, ‘mission accomplished,’” he added.
Connecticut entered last fiscal year with more than $37 billion in unfunded pension obligations and still spends more on pensions for state employees and teachers than most other states. (Most of that spending involves covering debt from past generations, not funding benefits for present-day public-sector workers.)
Still, the state has reversed its short-term financial position dramatically in the past seven years. That reversal includes a 2023-24 fiscal year that wrapped with $1.7 billion left over, a cushion equal to almost 8% of the General Fund.
But critics, particularly among Scanlon’s fellow Democrats in the General Assembly, say the state’s savings efforts are too aggressive and are drawing too many dollars away from education, health care, social services, municipal aid and other programs.
Connecticut had failed to save properly for more than seven decades prior to 2011 for the public-sector pensions it guaranteed, forfeiting billions of dollars in potential investment earnings in the process and leaving one generation to foot the bill for many.
As required annual pension contributions and other debt costs gobbled up ever-increasing shares of the state budget throughout the 2000s and 2010s, it did more than trigger deficits and tax hikes.
It also meant funding for core services rarely kept pace with inflation for the better part of two decades.
And the 2020s opened with the arrival of the coronavirus pandemic, which pushed demand for services to unprecedented levels.
Thanks to roughly $3 billion in emergency federal aid sent in 2021, Connecticut temporarily has been able to suppress that fiscal pressure and save huge dollars to begin attacking pension debt. But now those emergency funds largely have been exhausted.
The budget controls established in late 2017 to end the string of deficits were centered on a system known as the “volatility adjustment.” It bars legislators from spending a portion of income and business tax receipts that tend to fluctuate significantly from year to year. Most of this funding involves capital gains and other investment income achieved by high-earning households.
But while 2017 lawmakers envisioned a mechanism that would capture big dollars some years, and little to none in others, the volatility adjustment has never grabbed less than $530 million in its first seven years and has blocked lawmakers from spending an average of $1.4 billion per year.
Analysts also predict it will continue to capture between $800 million and $1.2 billion annually through 2028.
Since 2020, 21% of all revenue — excluding portions assigned to special budget funds — has gone into the pensions, on average, either through regular budgeted payments or via massive year-end surpluses transferred into these retirement programs. That’s nearly double the pace Connecticut contributed to pensions under Lamont’s predecessor, Gov. Dannel P. Malloy, who served from 2011 through 2018 and ensured the state always contributed the full required amount.
Meanwhile, legislators and interest groups say many core programs are in crisis.
Medicaid rates for doctors who treat the poor haven’t been adjusted in any broad-based fashion since 2008, leaving health care advocates worried that thousands of poor residents can’t find physicians willing to treat them.
Community college tuition this fall is up 11% from two years ago, while tuition and fees at regional universities are 7% higher than those in 2022.
Nonprofit agencies that deliver the bulk of state-sponsored social services to people with disabilities or to patients struggling with mental illness or addiction say they lose more than $450 million annually due to state payments not keeping pace with inflation since 2007.
Leaders of the Democratic majorities in the state House and Senate have said they want to scale back savings efforts somewhat to keep programs out of crisis but believe they still can balance budgets and whittle down pension debt.
“The conversation that I am seeing, that’s happening right now, is: Is there a way to continue that [savings] work but have that work also be adaptable to the moment that we’re in today?” Scanlon said Wednesday.
The comptroller added that “there are ways that we can look at the volatility cap. But we can’t just look at the volatility cap in a vacuum, because there are also other realities that come along with this.”
Analysts project Connecticut will continue to be paying on its pension debt into the early 2050s, and Scanlon warned that burden shouldn’t be underestimated.
Some short-term challenges remain as well, particularly in Medicaid. State spending in this program ran about $450 million over budget last fiscal year, and about $210 million in cost-overruns are projected in 2024-25.
Both House Speaker Matt Ritter, D-Hartford, and Senate President Pro Tem Martin M. Looney, D-New Haven, said they believe legislature and the comptroller are on the same page when it comes to the budget controls and that radical changes aren’t being planned.
“The idea of a flexible and realistic system of [fiscal] guardrails is necessary,” Looney said, adding it simply doesn’t make sense to have big needs going unmet in education, human services and town aid at the same time Connecticut is amassing record-setting surpluses.
The New Haven lawmaker compared it to having “a well-stocked refrigerator and a freezer in the basement and still skimping on meals.”
Ritter added that no Democratic legislators are looking to gut these controls or abandon them entirely,
“I think the question is, ‘what are we adjusting and what are we trying to spend it on?’” he said. “Nothing this important should ever be on auto-pilot, and we have to review it.”
Gov. Ned Lamont, other fiscally moderate and conservative Democrats and most Republican legislators favor leaving the guardrails system largely alone. But the GOP did suggest earlier this summer diverting some of last fiscal year’s reserves for a new purpose: to fund a modest cut in electric rates statewide.
Interest groups have lined up on both sides of the argument.
The Yankee Institute for Public Policy, a Hartford-based think-tank, recently co-sponsored a study urging officials to leave the budget controls alone. The institute projected that with an even more aggressive savings approach and some good economic fortune, Connecticut could eradicate its pension debt by the late 2030s or in the 2040s.
But Connecticut For All, a progressive coalition of more than 60 faith, labor and other civic groups, has argued for more than a year that the state is doing far too little for its children, people with disabilities and other vulnerable residents.
“It’s become clearer over time that the fiscal roadblocks were hastily created and are in desperate need of reform that is responsive to the dire needs of our communities,” Norma Martinez-HoSang, director of the coalition, said Thursday. “We need public schools that can properly educate our future generations, affordable housing and healthcare that can protect our working families and infrastructure that can lift up our communities. This will take bold leadership from elected officials who are brave enough to challenge the failing status quo and make the necessary changes to get Connecticut back on the road to prioritizing our communities.”