State officials had their sense of optimism tested Monday by a new report showing that revenues are down about $460 million across this fiscal year and next combined — yet overall finances remain well in balance.
Despite the new consensus forecast from Gov. Ned Lamont’s budget staff and by the legislature’s Office of Fiscal Analysis, Connecticut remains on pace to close this fiscal year more than $630 million in the black. About $270 million in cost overruns so far this budget year and $200 million in revenue shrinkage created that new estimate, which is still equal to a healthy 3% of the General Fund. But it’s not the $1.1 billion windfall analysts predicted when the budget was adopted last June.
And the preliminary $26 billion budget approved for 2024-25 is on pace to wrap with $735 million left over. That’s another 3% cushion. But after revenues were adjusted downward Monday by $264 million, it’s well below the $1 billion surplus originally envisioned.
These healthy-if-not-extremely-robust numbers are expected to set the stage for a lively debate next February when the General Assembly and Gov. Ned Lamont begin discussing how to revise 2024-25 finances.
“We’re coming down from a period of robust revenue grown as well as very generous federal outlays,” Office of Policy and Management Secretary Jeffrey Beckham said Monday, referring not only to the record-setting surpluses Connecticut enjoyed over the past three fiscal years but more than $2.8 billion that Congress awarded state government here to support Connecticut’s budget.
Beckham quickly added, though, that “I’m not seeing an economic downturn.”
But House Minority Leader Vincent J. Candelora, R-North Branford, said the key takeaway from this report shows the weakness of household budgets — if not that of state government.
With income, sales, business and health care provider taxes all eroding somewhat, “overall you are still seeing a sluggish economy,” Candelora said. “People are still suffering. That is something we need to be conscious of.”
Lamont and legislators from both parties supported one of the largest state tax cuts in Connecticut history next spring, centered on the first state income tax rate cut since the mid-1990s. This plan is expected to deliver about $300 per household to middle-income families starting with the 2024 tax year.
And administration officials have said even with the changing revenue picture, they remain confident that tax cut will be sustained.
“The policies we’ve put into effect over the last several years are boosting Connecticut’s fiscal health and making our state stronger,” the governor said.
Current budget surplus is little more than half of what was expected
At first glance, shrinking revenues didn’t appear to have had any immediate impact on state finances.
General Fund revenues for this fiscal year technically are up $24.4 million from the $22.5 billion anticipated in the original budget — razor-thin growth of 1/9th of 1%.
But not according to the fine print.
First, those numbers were buffeted by a one-time $139 million surge in federal grants, most stemming from new Medicaid reimbursem*nt calculations adjusted late last week.
More importantly, though, none of those numbers include another $224 million hit a key state savings program will face in the current fiscal year. Created in 2017, the volatility adjustment forces the state to save a portion of quarterly income and business tax receipts — outside of the General Fund — to help pay down Connecticut’s massive pension debt.
This savings program, which was supposed to collect about $702 million to help pay down Connecticut’s massive pension debt this year, now will generate about $479 million, analysts say.
And the challenges loom larger year after year.
Then, without a one-time bump in federal grants to cushion the blow in 2024-25, General Fund revenues will drop $15 million, analysts say. And the volatility adjustment savings program also will take a hit, collecting $452 million, or about $250 million less than originally forecast.
Historically, the new numbers are still well above average
But even with these revenue downgrades, the surplus estimates they generate look fairly rosy from a historic standpoint.
For two decades prior to 2018 — when the state’s new savings program arrived just in time to take advantage of a very robust stock market that produced huge income tax receipts — Connecticut never enjoyed a surplus greater than 3.3% of its General Fund.
In the five of the six years between 2018 and 2023, though, the surpluses ranged from 4.8% to 20.8%. The latter, which translated into a $4.3 billion windfall, was larger dollars-wise than the second- and third-largest surpluses ever, even if those numbers are adjusted for inflation.
“When you’re going from that kind of huge number,” said Rep. Maria Horn, D-Salisbury, House chairwoman of the Finance, Revenue and Bonding Committee, “the delta’s going to seem negative.”
Horn added that it was vital that Connecticut had a savings program and other fiscal guardrails in place during that period to ensure it could use that windfall to strengthen the state’s overall financial health.
During that period, Connecticut made about $7.7 billion in supplemental payments into its pension funds while raising its rainy day fund from slightly more than $210,000 to more than $3.3 billion.
“We remain in a position in which we are able to continue paying down legacy debt built up over the decades by previous administrations,” Lamont added.
State Comptroller Sean Scanlon agreed.
“While fluctuations in revenue projections are anticipated throughout the fiscal year, Connecticut continues to be in a strong fiscal position,” he said, calling Monday’s report “an important reminder that our fiscal guardrails are working as intended and illustrates why we must continue them.”
But Recovery for All CT, a progressive coalition of more than 70 faith, labor and civic organizations, also urged state officials not to lose perspective about growing needs statewide.
“After years of astronomically high revenue reports, it is to be expected that Connecticut would, at some point, trend back to ‘normal,’” coalition spokeswoman Drew Stoner wrote in a statement. “Luckily, normal for Connecticut still means a positive fiscal position with room to expand spending.”
The recovery coalition and other progressive groups have argued that the state budget spending cap, coupled with the volatility adjustment savings program, have dedicated a disproportionate share of Connecticut’s windfall toward paying down pension debt. And at the same time, they argue, that system is inadequately funding health care, social services, education and other core programs that were severely strained during the worst years of the coronavirus pandemic.
