Budget Outlook: What Accountability Reports Tell Us
Every November, the Office of Policy and Management and the nonpartisan Office of Fiscal Analysis release fiscal accountability reports, providing a detailed look at Connecticut’s fiscal trajectory for the next several years.
These reports are dense, technical documents—but they contain important signals about where the state budget is headed and the future trade-offs that policymakers will face.
This year’s reports clearly show how Connecticut is in better fiscal shape than it was a decade ago, but significant structural challenges remain.
Fixed costs continue to outpace revenue growth, recent pension reforms are paying dividends that have freed up budget capacity, and there are looming pressures—particularly in transportation and municipal aid—that will demand attention in the coming years.
Fixed Cost Challenges
The central tension in Connecticut’s budget is the growing gap between fixed cost growth and revenue growth.
Fixed costs—which include debt service, pension contributions, retiree healthcare, and entitlements like Medicaid—are projected to grow from $12.95 billion in fiscal 2026 to $15.13 billion in fiscal 2030, an increase of $2.18 billion. That works out to average annual growth of about 4%.
Revenue, meanwhile, is projected to grow at roughly 2.8% annually over the same period. As a result, we are looking at tighter budgets in fiscal years 2028-2030, all without any major expansion of existing programs.
The primary drivers of this fixed cost growth are debt service and entitlements.
Debt service is projected to grow at 4.7% annually, driven largely by continued bond issuances at higher interest rates relative to years past.
But the bigger story is Medicaid, which makes up roughly 70% of the state’s entitlement spending and is projected to grow by approximately $1.2 billion from 2026 to 2030—an average of about 5% per year.
This reflects a combination of utilization increases and policy adjustments despite flat or declining caseloads. It’s worth noting that an $80-$85 million Medicaid shortfall is already projected for the current fiscal year, driven by higher-than-budgeted hospital and pharmacy costs.
The growth in these expenditures will continue to crowd out the fiscal space available for everything else, be it tax relief or new programs. Across all funds, OFA projects average annual deficits of $250.8 million in fiscal years 2028-2030.
Pension Dividend
On a brighter note, this year’s reports highlight the importance of recent paydowns to the state’s large unfunded pension obligations, which have freed up hundreds of millions of dollars in discretionary spending.
Over the past six years, Connecticut has made cumulative additional deposits of $10.1 billion into its two major pension systems—the State Employees Retirement System and the Teachers’ Retirement System.
These deposits, funded largely through budget surpluses and the volatility cap mechanism that redirects excess revenues, have substantially reduced the state’s unfunded pension liabilities.
The payoff is significant. According to OPM, these additional contributions are now saving the state approximately $857 million annually in reduced actuarially determined employer contributions.
Without these deposits, the fiscal 2027 ADEC payment would have been $553 million higher for SERS and $310 million higher for TRS.
That annual budget capacity can now be directed toward education, healthcare, infrastructure, or other priorities instead of being consumed by pension obligations.
A decade ago, Connecticut’s pension systems were among the worst-funded in the nation and rising pension costs were squeezing out other budget priorities.
The combination of pension reforms and consistent additional funding has begun to reverse that trajectory.
SERS’ funded ratio improved from 55.2% to 59.6% in just the past year, while the unfunded liability decreased by over $1.5 billion.
That said, the state still carries substantial unfunded liabilities—$17.6 billion for SERS alone—and will continue making significant pension contributions for the next two decades until the systems are fully funded in fiscal 2046.
The pension dividend is real, but it’s the result of disciplined policy choices that must continue.
Pressures Ahead
While the General Fund outlook is manageable, several specific pressure points deserve attention.
Special Transportation Fund Insolvency. The fiscal outlook for the Special Transportation Fund is considerably more concerning.
OFA projects modest surpluses in 2026 and 2027, but increasingly large deficits beginning in 2028—leading to projected fund insolvency by 2030, with a deficit of negative $306 million in the final year.
Transportation costs, particularly debt service and transit operation costs continue rising while fuel tax revenues stagnate.
Near-term surpluses mask the underlying issue because one-time transfers are propping up the fund without addressing the out-year pressures.
Absent legislative action, this will require either new revenue sources, service cuts, or some combination of both.
Municipal Aid Erosion. State aid to municipalities (excluding teachers’ retirement contributions) is projected to remain essentially flat through fiscal 2030, hovering around $4.2 to $4.3 billion.
In nominal terms, that looks stable. But with inflation running at 2%-3% annually, flat funding represents a real decline in purchasing power.
Education Cost Sharing grants—the largest component of municipal aid—are actually scheduled to decrease beginning in fiscal 2028 as reductions for “overfunded” towns take effect.
This matters because municipal aid helps towns provide local services and keep property taxes in check. When state aid fails to keep pace with costs, the pressure shifts to local property taxpayers.
For a state that already has among the highest property tax burdens in the nation, this is a meaningful concern—particularly for communities with limited commercial tax bases.
Debt Growth. Connecticut’s constitutional guardrails, implemented in 2017, were designed to impose fiscal discipline not only on spending and reserves but also on borrowing.
In the years immediately following their adoption, bond issuances slowed considerably. More recently, however, bonding has accelerated—General Obligation bond issuances are projected at $1.9 billion in 2026 and $2 billion annually from fiscal 2027 through 2030.
This renewed borrowing has allowed the state to expand capital investments and other expenditures without running afoul of the spending cap, effectively creating budgetary headroom outside the General Fund’s operating constraints.
But that flexibility is narrowing. In fiscal 2026, the state sits approximately $3.66 billion below its statutory debt limit. By fiscal 2030, that cushion shrinks to roughly $1.45 billion.
While the state will remain within its limit during the period examined in these reports, the trajectory suggests that debt capacity will become an increasingly binding constraint in subsequent years.
This won’t present an immediate crisis, but it’s a dynamic worth monitoring—particularly as policymakers weigh future capital needs against a shrinking margin for new borrowing.
Conclusion
Connecticut’s fiscal position is stronger than it has been in years.
The Budget Reserve Fund is at its statutory maximum, pension contributions are shrinking thanks to years of additional deposits, and the state has weathered recent economic uncertainty without major disruption.
But the structural dynamics embedded in these reports suggest that challenges remain.
Fixed costs continue to outpace revenues. The transportation fund faces insolvency within five years. And municipal aid is quietly eroding in real terms, putting pressure on local budgets and property taxes.
These aren’t crises, but they are the kinds of slow-building pressures that, if left unaddressed, become much harder to solve later.
About the author: Dustin Nord is the director of the CBIA Foundation for Economic Growth & Opportunity.
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