Connecticut is anticipated to continue seeing budget surpluses into 2026, built on positive revenue growth that will outpace Connecticut’s fixed costs, according to the Fiscal Accountability Report released by the Office of Fiscal Analysis (OFA).
Connecticut’s fixed costs, which include debt service, Medicaid, retirement obligations and adjudicated claims, make up more than 50 percent of the General Fund budget. The growth of those costs had been outpacing revenue growth for years, leading to a structural imbalance in the state’s budget. Now that trend has reversed due, in part, to the state’s pay down of pension debt, according to the analysis.
“A significant contributor to the structural balance is a slowdown in fixed cost growth in the out-years, compared to prior years,” the analysis says. “This is due in large part to a reduction in the projected annual contributions to the State Employee Retirement System (SERS) and the Teachers Retirement System (TRS) because of additional deposits into the system over the past three years, as well as the completed phase-in of how SERS is funded.”
Connecticut’s revenue growth is now projected at 2.7 percent per year, as opposed to 1.6 percent fixed cost growth. This is a significant change from just a few years ago when the growth of Connecticut’s fixed costs was 5.4 percent, opposed to average revenue growth of 2.8 percent, creating a “structural imbalance” in Connecticut’s budget, according the 2020 Fiscal Accountability Report.
Connecticut has paid down more than $5 billion of its pension debt over the past three years, part of the 2017 budget’s volatility cap that requires volatile revenue derived from investment earnings to go into the budget reserve fund and, when the reserve fund is full, be used to pay down pension debt.
Those reductions are expected to save Connecticut $524 million in reduced annual pension costs during 2024 and 2025, according to OFA, although, they note, variables like cost-of-living increases and investment returns can have significant impacts on the overall size of the debt.
However, according to both OFA and the state’s Consesus Revenue estimates, Connecticut should be able to continue making large payments toward that pension debt to further reduce the annual contributions.
The OFA projects General Fund surpluses over the next three years, including $931.7 million in 2023 and $822 million in 2026. In 2023, the state expects to pay down another $2.7 billion in retirement debt and still have surplus revenue left over.
However, Connecticut’s retirement health benefit costs are expected to increase $700 million by 2026, according to the report, as medical and prescription costs continue to rise.
Connecticut’s revenue growth is built largely upon investment earnings coming in higher than anticipated and sales tax revenue growth driven by inflationary increases in goods. But that same inflation will also impact the state’s expenditures, according to the report.
And while Connecticut’s overall budget picture remains positive at this point, the OFA does warn of possible issues down the road over rising interest rates meant to fight inflation and concerns about an economic downturn.
“Nationally, inflation is currently at a 40-year high, and it is inevitable that some state expenditures as well as certain state revenues will be impacted,” the report says. “Whether the Federal Reserve can reduce inflation without triggering a recession is uncertain.”
The OFA’s fiscal accountability report is based only on current expenditures and cannot account for future spending increases, which may change the overall balances.