Despite Connecticut’s improved revenue and budget picture for the next four years, the state’s fixed costs will still take up more than half of the General Fund budget, according to the latest Fiscal Accountability Report released by the Office of Fiscal Analysis (OFA), and while that figure is quite high, the latest report marks an improvement in the state’s financial situation.
According to OFA, Connecticut’s fixed costs – a combination of Medicaid, debt payments, pension and retiree health benefits, adjudicated claims and supplemental payments to hospitals – account for roughly 53 percent of the current General Fund budget and will rise to 54 percent by 2028. In hard numbers, that’s an increase from $12 to $13.1 billion dollars.
Connecticut’s fixed costs experienced a massive increase between 2006, when they accounted for 37 percent of the budget, to 2018 when it reached the 53 percent mark, but the latest projections mark a stark turnaround for Connecticut’s budgetary fortunes. Namely, Connecticut’s revenue growth is projected to keep pace with the growth of the state’s fixed costs, something that was out of reach just a few years ago.
In the 2020 Fiscal Accountability Report, fixed cost growth was projected to be 4.8 percent in the out years, while revenue was only growing at 2.2 percent, part of a structural deficiency. It was part of a longer-term trend for which the state saw little relief in the previous decade. In those years, the increase in fixed costs had to be made up for with either cuts to non-fixed expenditures or tax increases to bring in more revenue.
This year, however, there has been an improvement, with both Connecticut’s revenue and fixed costs on pace for 2.5 percent growth through 2028. Connecticut’s surge in revenue during the pandemic years, with high growth from Wall Street-related income taxes, business taxes and sales taxes, puts the state ahead of fixed costs by roughly $282 million per year, contributing to projected surpluses through 2028, and creating a “positive structural balance,” according to OFA’s report.
While revenues in key areas like the estimates and finals income tax, the pass-through entity tax and sales taxes are expected to decline, the state is projected to continue with budget surpluses and transfers under the state’s volatility cap – which transfers volatile surplus revenue to the budget reserve fund and to pay down the state’s pension debt, part of the fixed costs.
The primary growth factor of Connecticut’s fixed costs is Medicaid, which makes up the largest portion of fixed costs. The federal and state program accounts for $5.4 billion in state expenditures and is expected to grow by nearly $380 million between 2025 and 2028. Connecticut’s bonded debt payments are projected to grow by $181 million over those same years, accounting for $2.7 billion in 2028.
But the state is expected to see lower pension costs for state employees, thanks to multiple years of paying off the state’s unfunded liabilities through the volatility transfer, part of the fiscal guardrails established under the 2017 bipartisan budget. The state paid down 1.4 billion in State Employees Retirement Service (SERS) debt between 2021 and 2022 and is expected to pay down more this year and in the coming years. The paydown frees up additional money in the budget for non-fixed costs to the tune of $110 million by 2026.
Connecticut has been making similar payments toward its Teachers Retirement System (TRS) debt, however, the cost of TRS is still expected to rise, according to the report. While SERS costs are expected to decrease, TRS costs are expected to increase by 3.6 percent on an annual basis.
Part of this increase is due to how the TRS debt is calculated – transferring from a level percentage payroll funding to a level dollar amortization – but is also the result of a 2.2 percent increase in TRS membership and a 4.4 percent increase in payroll, combined with debt service for pension obligation bonds taken in previous years to support the system.
Despite the debt paydowns in TRS, the total cost of the system will increase by nearly $200 million between this fiscal year and 2028 when it is then expected to level out.
While the state has shown an expected downturn in its red-hot revenues from 2022, the state is estimated to see continued budget surpluses and pension debt paydowns in the coming years.
Gov. Ned Lamont and other elected officials like Connecticut Comptroller Sean Scanlon indicated the state must continue to enforce the fiscal guardrails established in 2017, which included not only the buildup of the state’s reserve fund and pension pay down but also a bonding cap to limit the growth of Connecticut’s debt payments.
Under the bonding cap the state is limited to how much it can bond each year. While the cap was set at $2 billion, the figure does adjust for inflation, but, according to the report, Connecticut has been keeping well within those limits.
“The policies we’ve put into effect over the last several years are boosting Connecticut’s fiscal health and making our state stronger,” Gov. Lamont said in response to the latest consensus revenue estimates. “This forecast demonstrates the importance of the revenue and volatility caps in giving the state a buffer from potential economic downturns. Other states do not have the strong fiscal guardrails that we have in place and are seeing erosion in their general fund revenue because of their reliance on volatile revenue sources.”
According to the Fiscal Accountability Report, “The annual growth in revenue from FY 26 through FY 28 is sufficient so that no adjustments to non-fixed cost expenditures are necessary to accommodate the annual growth in fixed costs.”
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