CT budget experts predict years in the black

Quietly and without blanket explanations, two state agencies released reports late Friday heralding the end of a somber era for Connecticut.

The reports revealed good news on the government budget front: The regular surplus for this fiscal year has now reached $1 billion, more than double October’s figure, as tax revenue estimates rose and spending fell in some areas .

Additionally, the state’s Rainy Day fund is expected to overflow by $1.8 billion before June 30 — money from capital gains and dividends that isn’t part of the regular spending stream.

None of this year’s $2.8 billion windfall, which builds on last year’s $5 billion surplus, comes as a surprise. Since mid-2020, we’ve seen a drumbeat of upbeat updates from the two agencies — the bipartisan Office of Fiscal Analysis (OFA) in the Legislature; and the governor’s budget office, known as the Office of Policy and Management, or OPM.

But the new reports also show something we haven’t seen in more than a decade: Connecticut’s icy debt backlog — spending like pension payments, Medicaid, and health care for employees and retirees — stretches into at least 2026 and has finally slipped under scrutiny .

No more doomsday deficits dangling blood red over our collective political heads. Wow.

With three numbers in the black for fiscal years 2024, 2025 and 2026 – highlighted on the cover of the most recent OFA report – the “period of permanent state and local government fiscal crisis” is, in my opinion, nearing an end. With these words, former OPM secretary Ben Barnes announced the never-ending crisis in November 2014 – although it had begun long before that.

In budgetary language, authorities are saying that for at least the next three years, growth in government revenue – basically taxes – will outpace growth in so-called “fixed costs,” like the big items I mentioned that caused the years of pain .

Translation: Connecticut brings in enough money to support the family and pay the bills — including the mortgage and that scary credit card excess — without having to borrow money from Uncle Fred or drive on dead tires.

That means the “permanent financial crisis,” the era of constant tax hikes, cuts in government services, hiring freezes, and demands for the return of government employees, is over. At least we hope so.

As an exclamation mark, Standard & Poor’s upgraded Connecticut’s credit rating on Monday. S&P and the other two top Wall Street rating agencies raised the state’s ratings in 2021 for the first time since 2001, before the September 11 attacks.

As with all things economic, there is always an “other side” to worry about. Connecticut’s long-term debt remains huge, in the $90 billion range. If we hit a recession, or if Governor Ned Lamont and the Democrat-dominated General Assembly push too hard on spending, all bets are off.

But unlike 2009, this time we’re prepared for a recession with a $3.3 billion rainy day fund. And even if we overspend on programs—which won’t happen if the cautious Lamont has his way—we can adapt more easily than we did in the days when fixed costs hung over us like a knife on a string.

A moment to celebrate

If you’re already missing the drama, take heart. None of this means tough decisions and budget struggles are over.

The Connecticut government is not short of non-fixed costs, myriad programs such as expanded child care, community grants and improvements in higher education. If the increase in these costs exceeds our ability to pay, we are under the sword again.

For example, we have launched tens of millions, maybe hundreds of millions of dollars of programs funded by federal pandemic assistance funds that expire next year. If we want to continue that, or if we want to lower the state’s very high taxes, we have to find the money.

Still, we should take a moment, just a moment, to celebrate the end of the perennial crisis.

“This is a tremendous accomplishment of which we are very proud and very pleased,” said Jeffrey Beckham, Lamont’s chief budget officer as secretary of the Office of Policy and Management.

For a variety of reasons, these fixed costs “have inexorably increased and increased and increased,” Beckham said, exceeding our ability to pay them without painful measures like tax hikes and benefit cuts.

Now, for other reasons, the vicious circle has finally turned into a more positive one, where an improved fiscal picture translates into a stronger economy, attracting residents and businesses, which in turn improves the fiscal picture.

Beckham corrected me when I implied that “structural deficits” — the state’s inability to cover the costs of all ongoing services — were also over. Lamont’s budget proposal in February will still involve tough decisions. Still, it’s crucial to reduce the stranglehold of fixed costs through debt, claims, and obligations.

“No one here can remember when that was the case,” Beckham said.

The roots of a turning point

What caused the change? It begins in the depths of the crisis.

As Connecticut struggled to emerge from the Great Recession in 2011, former Gov. Dannel Malloy won office and inherited a projected $3.7 billion-a-year budget gap to fill, plus $900 million in debt from funds that the state had borrowed just to stay afloat.

Mandatory pension payments rose after both parties delayed payments for decades, like a low-income family digging deeper into high-yield debt.

Malloy’s first major tax hike and employee perks came that same year. By November 2011, annual budget projections called for clear sails — $700 million in surpluses by 2016.

Reality quickly struck: labor savings did not materialize as planned, and the state’s economy largely stalled while the rest of the nation recovered.

Year after year, projected deficits weakened Connecticut by between $400 million and $2.7 billion, prompting Barnes, Malloy’s budget chief, to make the comment about an ongoing crisis.

But Malloy and Barnes slowed growth in agency spending to near zero after spending surged under two previous governors. We can argue forever if her multiple rounds of staff gifts were enough; they have a positive impact on today’s budgets.

Malloy left Lamont a $1.7 billion rainy day fund in addition to the goose egg he inherited, though economic growth and healthy tax revenues remained elusive.

“I think we laid the right foundation for what others have done very well,” Malloy told me in a phone interview on Sunday. “I’m glad I played a part.”

Tax cuts vs. investments

In the fall of 2017, when a budget agreement was four months overdue, Republicans and Democrats in the Legislature reached a landmark agreement under which tax revenues above a certain threshold could not go into the general budget for spending from capital gains and dividends, which rise and fall dramatically . That money had to go straight to the Rainy Day fund.

That (along with a change in hedge fund tax rules in 2020) has led to the large surpluses amid Wall Street runups. With that excess revenue and the reminder of Lamont’s roughly $400 million tax hike in 2019, Republicans want bigger tax breaks. They say the government is sane while the citizens are fighting. You are not wrong.

Lamont has poured every available penny into these grossly underfunded pension funds for state employees and teachers. He’s already paid $5.7 billion and saved taxpayers $485 million a year in retirement expenses over the next 25 years — a tax cut that helps solve the budget conundrum.

Some Democrats, especially after winning the election strongly, say this is the time to address the inequalities that leave so many families behind. Rep. Toni Walker, D-New Haven, chairman of the budget committee, cited higher education, state support for struggling school districts and a shortage of nurses at the state Department of Mental Health and Addiction Services.

“We have a lot of mistakes there that I’m not comfortable with, and a lot of them are caused by vacancies in government,” Walker told me Monday, referring to government spending freezes — mistakes — as a ubiquitous cost-saving measure.

Walker isn’t clamoring for whole new ways to spend money.

“I don’t know about new programs, I need to see what the requests are. But I worry about the existing programs,” she said.

The Pandemic Effect

All of this is complicated by the pandemic aid funds that have poured into Connecticut and every other state. The state coffers received $2.8 billion for projects to support the economy, as well as direct costs for testing and other protections against the virus. Cities and towns have received or will receive an additional $3.1 billion by next year.

Individuals received billions more.

Some say all that federal money has ended the state’s fiscal mess. To be clear, very little of it — none last year and $315 million this year, far less than the surplus — is used in the regular state budget. But of course, all that money has improved the economy, and that’s led to higher sales tax, state income tax, and corporate income tax revenues.

We cannot know what will happen in the next year or the year after that. Remember, at the height of the coronavirus shutdown, some economists were predicting a government budget collapse and the opposite has happened.

Two factors favor Connecticut. First, projected tax collection gains are modest by historical standards at 2.9 percent per year, and even that is enough to pay for the state’s fixed costs. More would be a bonus and would secure new tax cuts.

Most importantly, since the pandemic, people have moved to Connecticut from other states. If this continues, the state wins. If it reverts to the old exodus pattern, we lose.