Deficit Forecasts, Economic Concerns Spark New Calls for Spending Reforms

Issues & Policies

Connecticut faces major budget deficits approaching $3 billion through the next five fiscal years, generating renewed calls for state spending reforms.

New reports from the legislature’s nonpartisan budget office and the governor’s Office of Policy and Management forecast a $29.7 million deficit for the current year, a $183.8 million surplus for fiscal 2021, and then three straight years of red ink.

Connecticut's Budget Outlook, December 2019

Office of Fiscal Analysis staff told lawmakers at a Dec. 5 hearing the projected current year deficit was due to a $100 million shortfall in anticipated revenue.

OFA and OPM forecast a modest surplus for the second year of the two-year, $43.4 billion budget adopted by the 2019 General Assembly, while projections for the following years are raising real concerns.

While the legislature did not raise tax rates in the current two-year budget, lawmakers relied almost exclusively on tax and revenue hikes to resolve a $3.7 billion deficit.

The budget, which passed the House on an 86-65 vote and the Senate 20-16, increased spending by 1.7% in fiscal 2020 and by 3.4% for fiscal 2021.

For further context, state spending is just $200,000 below the mandated cap for 2020 and $5 million under for 2021.

Fiscal Challenges

Next fiscal year’s expected surplus and the fact 2020 is an election year will buy the administration and legislature some time before they face the next big fiscal challenge—closing the $1.9 billion deficit projected for fiscal 2022 and 2023.

“One thing’s for certain—we cannot afford to tax our way out of another budget crisis,” says CBIA’s Eric Gjede, noting that the 2011 and 2015 tax hikes—two of the biggest in Connecticut’s history—failed to stabilize the state’s fiscal situation.

“Tax certainty and fiscal stability are essential for attracting and retaining much-needed private sector investment.”

CBIA’s Eric Gjede

“Connecticut’s economy and job growth have not matched the region or the national average over the last decade and our inability to resolve the state’s long-term fiscal challenges is a key factor.

“Tax certainty and fiscal stability are essential for attracting and retaining much-needed private sector investment in the state, the type of investment that drives long-term job and economic growth.”

Tax Revenues

At the Dec. 5 hearing, OPM Secretary Melissa McCaw told legislators state personal income tax revenue has grown at a much slower rate over the past nine years compared with pre-recession levels.

The OPM report says Connecticut’s job growth since the recession ended in 2010 “has been skewed toward lower-wage industries, especially when compared to the jobs lost during the recession.”

Connecticut lost 54,300 jobs in higher-wage industries—45% of all job losses—during the 2008-2010 economic downturn, recovering just 8,900 or 16% of those jobs through September of this year.

In comparison, Connecticut lost 39,400 jobs in lower-wage industries during the recession, recovering 49,300 (125%) of those positions.

“Average annual wages are growing at 1.9% per year in the post-recession period compared to 4.0% per year before the recession,” the OPM report says. “In FY 2019, employment grew 0.4% while the average annual wage grew 2.8%.”

The report also notes Connecticut trails the region and country in a number of key economic growth indicators, including jobs, population, home sales and prices, and gross domestic product. 

Key Economic Indicators: 2010-2018 Growth Rates

JobsPopulationHome SalesHome PricesReal GDP
New Hampshire9.2%3%26.7%27.3%13.8%
Rhode Island8.4%0.4%26.4%26.7%4.4%
United States14.4%5.7%27.7%50.2%19.5%

Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Office of Policy and Management

Fixed Costs

Fixed costs—funding state employee pension and retirement benefits, teacher retirement and health benefits, debt service, and Medicaid and other entitlements—continue to dominate any state budget discussion.

For instance, active and retired state employee wages and benefits represent 31.7% of fiscal 2020 spending, municipal aid (including teachers’ retirement costs) accounts for 21.7%, and 11.6% of this year’s expenditures are for debt service.

OPM projects the state’s fixed costs will grow an average 4.8%—$2 billion—from fiscal 2020 through 2024 while revenues are forecast to increase an average 2.4%, a gap of $770 million.

About two-thirds of state spending goes toward state employee wages and benefits, municipal aid, and debt service.

While revenue growth is projected to exceed fixed cost growth in fiscal 2024, the state’s long-term liabilities—now around $85 billion—continue to diminish Connecticut’s ability to properly address essential state services such as education and transportation.

McCaw told legislators that based on contribution changes made during the 2019 legislative session, the State Employees Retirement System should be fully funded by 2048, with the Teachers’ Retirement System following two years later.

Debt service as a percentage of the state budget is also forecast to begin leveling out, growing from the current year 11.7% ($2.28 billion) to 12.7% ($2.83 billion) by fiscal 2024, based in part on the Lamont administration’s self-imposed “debt diet.”

Reserve Fund

The state’s reserve fund now stands at a relatively robust $2.5 billion, although McCaw cautioned that $1.3 billion of that was attributable to “one-time, non-repeatable factors,” including the repatriation of deferred overseas hedge fund profits and the new pass-through entity tax.

The fund balance is expected to reach 15% of the annual state budget in fiscal 2021. Under state law, any reserves above that threshold are directed to the state employee and teacher retirement funds and paying down bonded debt.

Both McCaw and OFA director Neil Ayers warned that the U.S. may be overdue for a recession, given the current economic expansion is now the longest since the end of World War II.

“We should continue to brace ourselves and be prepared.”

OPM Secretary Melissa McCaw

“We’re not predicting a recession or predicting a lack of recession,” Ayers said.

“We should continue to brace ourselves and be prepared,” McCaw said, adding that while the state is relatively well-positioned to navigate a moderate economic downturn, it has “insufficient resources” to withstand a severe recession.

Connecticut has not escaped its endless cycle of deficits, as shown by the state’s post-recession job and economic growth numbers, an indication lawmakers should put greater emphasis on cutting costs and promoting pro-growth tax policies in the 2020 legislative session and beyond.

For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede


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