Connecticut effectively has won the lottery jackpot over the last six years, when it comes to the state budget.
There have been nearly $11 billion in budget surpluses since 2017.
In the last three years, the windfalls matched or exceeded 8.5% of the General Fund. No surplus topped 3.3% in the two decades prior to 2017.
And just two years ago, the state shattered all modern records, closing $4.3 billion in the black, a 20.8% surplus, larger than the second- and third-largest ever combined.
But now, it appears to be over.
New consensus projections coming Monday from Gov. Ned Lamont’s budget office and legislative analysts are expected to show that Connecticut’s budget remains in balance. But the ridiculous levels of black ink are done.
The challenge for Lamont and lawmakers now will be to find perspective. State finances aren’t crippled, they just aren’t booming.
“I think we’re running more lean than we were over the past couple of years,” Lamont said Wednesday, adding that Connecticut’s fiscal position nonetheless remains strong. Roughly $7.7 billion of its surpluses have been used to pay down pension debt, and the rainy day fund now holds more than $3.3 billion, which is equal to 15% of the General Fund and the maximum allowed by law. “It’s a pretty good place to be,” the governor added.
“It looks like we’re coming down from a high, and we’re going to have to readjust accordingly,” said Office of Policy and Management Secretary Jeffrey Beckham, Lamont’s budget director.
“It’s going to be a little bit of a change,” Beckham said, adding that for some, it may seem “sudden and abrupt.”
The administration’s last forecast for this budget year, which began July 1, came on Oct. 20 and anticipated an $895 million surplus. That includes General Fund revenues that top anticipated spending by $212 million — and another $683 million from a special program that forces the state to save a portion of quarterly income and business tax receipts. Combined, that surplus represents 4.1% of the General Fund that legislators approved last May.
But budget analysts reassess revenue projections three times each fiscal year — mid-November, mid-January and late April — and Monday’s forecast will show eroding revenues that will shrink that cushion.
“We’re seeing some softness in our revenue,” Beckham said. While he didn’t offer specific numbers, he said major revenue engines, such as the income tax and a quarterly business tax, are pulling back somewhat.
And analysts project that erosion, he added, is likely to continue at least into the next fiscal year.
Nowhere to go but down
Still, the budget director, said, it’s important to keep perspective.
No one expected Connecticut to keep churning out annual surpluses averaging about $1.8 billion — between 8% and 9% of the General Fund — as it did from 2018 through 2023.
State government received $2.8 billion in federal COVID relief through the American Rescue Plan Act that it could use directly to assist the state budget. It’s been using those dollars since 2022 and will finish spending them in 2025.
But the biggest assist to state finances has come from a stock market that boomed between 2018 and early 2022. And while it has dipped since then, it hasn’t plunged for any sustained period over the past year and a half.
The robust market, coupled with Connecticut’s great pockets of wealth and financial services sector, helped to push state income tax receipts from nearly $9 billion in 2017 to more than $11.2 billion last fiscal year, according to records from the comptroller's office and Lamont's budget office.
When you hit a budget surplus of $4.3 billion as the state did in 2021-22 — a cushion 30% larger than the entire $3.3 billion rainy day fund — there’s nowhere to go but down.
“We’ve been very lucky,” Beckham said. “The economy has surpassed everyone’s expectations. … No one thought it would play out this way.”
Certainly no one thought so in 2017, when a bipartisan coalition of legislators adopted a stringent spending cap and other fiscal guardrails designed to force government to save.
Connecticut’s economy had lagged the nation’s in recovering from the Great Recession of 2007-09, and that took a toll on public finances. State budgets finished in deficit four times in seven years between 2011 and 2017, despite two of the largest tax hikes in state history.
Economic uncertainty lingers
University of Connecticut economist Fred Carstensen said state officials need to remember that some of the underlying problems that led to that string of deficits still exist. And new issues are arising as well.
Though Connecticut has recovered nearly all jobs lost during the early months of the coronavirus pandemic in 2020, it still is below pre-Great Recession levels. Lamont noted that the state has enjoyed population gains in recent years, which means more taxpayers. According to U.S. Census Bureau estimates, Connecticut gained added more than 57,000 residents between 2018 and 2022.
But too many Connecticut residents now work outside the state to secure high-paying jobs, Carstensen said.
The state Department of Labor doesn’t track precisely how many residents work out of state. But it does record how many Connecticut residents have jobs, here or in any other state. It also records how many people work within Connecticut.
And the gap between those two tallies has been widening.
In 2013, there were about 65,000 more Connecticut residents with jobs than there were people working in this state. One month before the pandemic began in March 2020, it topped 158,000.
A booming stock market can mask this weakness, but as Wall Street slows and federal pandemic aid expires, the problem becomes noticeable.
“You would expect to see [revenue] erosion over time as the good jobs relocate,” he said.
State government also has a huge legacy of debt that is expected to continue to constrain budgets well into the 2030s or later. Payments on these obligations already consume roughly 30% of the General Fund.
And as impressive as the surpluses of recent years have been, they are dwarfed by Connecticut’s long-term debt.
Between unfunded pension and retiree health care obligations, along with bonded debt, the state entered 2023 owing more than $88 billion, making Connecticut one of the most indebted states per capita in the nation.
And while Connecticut has stabilized its debt situation, it's crucial for the General Assembly to adhere to the fiscal guardrails, especially if the state won't be seeing more record-setting surpluses in the near future, Lamont said. “It’s certainly an important priority for a governor ... Sometimes for individual legislators, it’s not as much of a priority.”
State Comptroller Sean Scanlon said in his latest monthly fiscal forecast that “the overall health of our budget is strong.”
But he also said that while the state’s 3.5% unemployment rate is at its lowest since before the COVID outbreak, housing sales and new listings were down in September compared with that time one year ago.
And Carstensen warned officials not to underestimate the problems created last month, when the federal government ended a three-year hiatus on student loan payments.
According to a new analysis from The Pew Charitable Trusts, “approximately 43 million Americans with student loans will have less money to spend.” The average student loan payment prior to the pandemic, Pew analysts wrote, was $236 per month.
“It means you’re going to go out for dinner less often,” Carstensen said. “It means you’re going to engage in less discretionary spending.”
Still, both Lamont and Beckham said optimism on Wall Street that the Federal Reserve Bank is done boosting interest rate hikes bodes well for the economy, and for state finances.
“It does look right now like we could have a soft landing,” the governor said, adding he is cautiously optimistic the nation can avoid slipping into recession over the next year or two.
“It’s clear we’re coming to the end of a positive time,” Beckham said. But “I don’t see any evidence we’re heading into gloom and doom.”