With Connecticut’s projected budget surpluses decreasing from their post-pandemic highs and fixed costs taking up more than 50 percent of the budget, the state’s foremost budget forecasters warned about possible increases in state spending in the years ahead during a joint hearing before the Appropriations Committee and the Finance, Revenue and Bonding Committee.

“Growth in costs not categorized as fixed are anticipated to present significant budgetary challenges over the next few years,” said Secretary of the Office of Policy and Management (OPM) Jeffrey Beckham. 

Connecticut’s fixed costs like Medicaid, pensions, and bond payments, take up 54 percent of the budget, leaving the remaining 46 percent for non-fixed costs, which include such big budget items as education funding, municipal aid and state employee pay. 

Connecticut has turned a corner with revenue growth outpacing fixed cost growth following a decade of fixed cost growth creating a structural deficit, but lawmakers also must contend with funding ongoing non-fixed costs for a multitude of state programs as federal pandemic funding dries up.

The Fiscal Accountability Report by the Office of Fiscal Analysis (OFA) only accounts for fixed costs in the out-years and, according to the report, during fiscal year 2026, Connecticut will have a surplus of $206 million, followed by $310 million the following year.

However, some Connecticut state agencies, its higher education system and state-funded nonprofits have been calling for more state funding since federal pandemic funds have dried up, putting pressure on lawmakers to ramp up spending in lieu of the declining American Rescue Plan (ARPA) funds. Following Lamont’s budget presentation in 2023, officials from UConn protested a reduction in funding – something Beckham and Lamont argued was due to the reduction of one-time ARPA revenue.

“I know that when you passed these (ARPA allocations), I think you were very explicit that these were one-time in nature,” said Office of Fiscal Analysis Director Neil Ayers. “All recipients may not hear that and it’s certainly going to put pressure on you as decision makers.”

“It’s just a challenge, the stuff that’s not covered under the fixed cost drivers category, all that stuff goes up,” Beckham said. “You hear from people every year, I hear from people every year, we need to do more in all those categories. They’re not wrong, but we have to stay within our means.”

“Education is a big driver, as well as higher ed, which continues to have some challenges and difficulties we’re working with them on,” Beckham said. “Those are some of the areas where I see some difficulty. We know we want to pick up some of the ARPA funded stuff that we did, for example, on behavioral health for kids. It’s very important that we pick some of that up going forward.”

Beckham said that while Connecticut’s revenue growth is exceeding the growth of the state’s fixed costs, if non-fixed spending were factored into the reports from OFA and OPM the total cost growth would “not be less than” revenue growth. By statute, OFA can only account for fixed cost growth in the out-years.

“This is not a complete picture and narrative of what the state needs to consider with this next budget true-up and in the next couple years outgoing,” said Rep. Tammy Nuccio, R-Tolland. “We’re seeing drastic downturns already in revenue and everything else and we need to account for that, which is why I think that the guardrails are important as they are.”

The Lamont administration and General Assembly will also have to contend with possible state employee wage increases in 2025, part of the 2022 agreement between the state and the State Employees Bargaining Agent Coalition (SEBAC) that has a wage re-opener built in for 2025. Under the terms of that $1.9 billion agreement, state employees received 2.5 percent annual wage increases between 2021 and 2024, plus 2 percent step increases. Negotiations for the wage re-opener are set to begin in 2024.

While the cost impact of the SEBAC agreement for fiscal year 2025 is built into OFA’s estimates, the out-year estimates for 2026 to 2028 only account for fixed costs, meaning another wage and annual increment could affect the state’s projected out-year surpluses.

According to OPM’s numbers and presentation, Connecticut is also expected to be over the state’s Constitutional Spending Cap by nearly $30 million in the next year, something Beckham said lawmakers will have to deal with.

The spending cap, along with the bonding cap and volatility cap, are some of the fiscal guardrails that the General Assembly passed in 2017 and continued in 2023. The Lamont administration and other elected leaders contend those guardrails have helped Connecticut achieve surpluses and balanced budgets while paying down long-term debt and amassing a $3.3 billion reserve fund.

But revenues from Connecticut’s volatile Estimates & Finals income tax and Pass-Through Entity Tax have been falling more quickly than previously predicted. Connecticut’s sales tax revenue, which rose significantly post-pandemic, is also returning to more normal 2.5 percent annual growth. Ayers remarked that all three taxes had experienced “all-time highs” during the post-pandemic years.

In September of 2023, Comptroller Sean Scanlon projected a fiscal year 2024 surplus of $390 million. By December, however, that estimate had declined to $153.9 million.

“Despite a reduction in the General Fund surplus projections, our state’s finances continue to show signs of strength,” Scanlon said in a press release. “We are still forecasting a surplus, even after Governor Lamont signed the largest income tax cut in the state’s history. Heading into 2024, we still have a full Rainy Day Fund at $3.3 billion, and our unemployment rate remains below the national average. These factors put our state in a position to weather potential economic headwinds.”

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