Debt costs, shrinking revenues taking big toll on next CT budget

Top from left, Senate Republican leader Len Fasano, House Republican leader Themis Klarides and Malloy administration budget director Benjamin Barnes

Top from left, Senate Republican leader Len Fasano, House Republican leader Themis Klarides and Malloy administration budget director Benjamin Barnes

Surging debt costs and shrinking revenues alone will force state officials to cut $1.1 billion to $1.3 billion out of the next state budget to avoid tax hikes, according to separate analyses Tuesday from two fiscal agencies.

But the Fiscal Accountability reports from Gov. Dannel P. Malloy’s budget office and from the legislature’s nonpartisan Office of Fiscal Analysis still don’t reflect the full reduction discretionary programs probably would face to stave off tax hikes.

Because of a change in format ordered last May by Malloy and the legislature, these reports no longer project cost changes in all segments of the budget, including contractually mandated pay hikes for unionized state employees.

The new format also stops the two offices from providing updated deficit or surplus projections for the next three fiscal years — a move that remains controversial among some legislators. The last warning legislators received from nonpartisan analysts came in September, when they projected state finances, unless adjusted, would run $1.3 billion in deficit in 2017-18 and $1.4 billion in the red in 2018-19.

Malloy, who spoke with Capitol reporters Tuesday morning, warned that Connecticut faces “gigantic challenges” as it tries to compensate for surging debt costs — most caused by seven decades of inadequate saving for public-sector retirement benefits. And “it will require adjustments to be made in other parts of the budget,” the governor said.

Contributions to state employee and teacher pension funds, health care for retired state workers and their spouses, and payments on most state borrowing — excluding transportation bonds — together will rise by $820.4 million, according to Malloy’s budget agency, the Office of Policy and Management. Certain other fixed costs involving Medicaid and federal entitlements, will rise by $276 million.

Those growth estimates, coupled with new projections that General Fund revenues next fiscal year will fall $190 million below the current year effectively create a $1.29 billion problem for officials hoping to avoid tax increases.

Legislative analysts’ estimates were very similar. OFA says the retirement obligations, other debt costs, and entitlement programs, should cost about $900 million more next fiscal year.

Coupled with $189 million in revenue erosion, that creates a problem of at least $1.1 billion for Malloy and legislators to solve in the 2017 General Assembly session, which starts on Jan. 4.

Still, Republican leaders in the House and Senate questioned Tuesday whether the reports captured the full scope of the problems facing state finances.

Past reports also tried to project the cost of all “current services” in coming years. Areas analyzed in past reports but not in the latest versions include:

  • Employee wage and benefit changes, including those mandated by contract.
  • Program and municipal aid changes required by law.
  • Inflationary cost increases.
  • Projected changes in social service caseloads in non-entitlement programs.

Those reports also included projections of whether state finances, if unadjusted, would run in surplus or in deficit in each of the coming three years.

Between 2012 and 2015, the Fiscal Accountability Report from nonpartisan analysts repeatedly warned that spending was on pace to grow faster than revenues, projecting deficits in the upcoming budget cycle each time.

But Malloy administration officials argue that these projections have no value, noting that the legislature routinely delays or cancels municipal aid increases written into statute, and that agencies frequently are asked to make due without inflationary increases.

The Democrat-controlled legislature approved his proposal last May to remove such “current services” projections from the budget.

House Minority Leader Themis Klarides, R-Derby, who objected to stripping these projections from the reports, argued that they warned lawmakers when state spending was unsustainable.

And Klarides said Tuesday that there is plenty of evidence that the challenges facing Connecticut in the next budget are larger than those outlined in the new reports.

Nonpartisan analysts estimated this past summer that state finances, unless adjusted, would run $1.25 billion in deficit next fiscal year. That was before revenue projections were downgraded and teacher pension contribution costs rose faster than expected.

Based on those changes, the projected deficit for next year would rise to $1.5 billion.

“We are questioning the methodology that ignores reality,” Klarides said. We are witnessing the same old nonsense and denials about our finances that we have failed to confront.’’

Senate Republican Leader Len Fasano of North Haven said, “This report shows us what would happen if the state only funded the absolute bare-bones of our budget. Even this austere projection still leaves us with a budget deficit of $1.3 billion in the next fiscal year. That’s not even including things like inflation and promises the state has made to our municipalities and private providers. … This report shows the devastating truth that Connecticut can’t pay for core government services if we continue on the same path we’re on now.”

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