Connecticut lawmakers to face difficult budget session, according to analysts

Inside Investigator – Tuesday, December 10, 2024
By Marc E. Fitch

Lawmakers on the powerful Finance, Revenue and Bonding Committee and the Appropriations Committee got a snapshot of the fiscal pressures they will face in the upcoming 2026 legislative session, as increasing costs and the end of federal pandemic funds will quickly consume the $190 million projected budget surplus.

The heads of the Office of Policy and Management (OPM) and the Office of Fiscal Analysis (OFA) presented Connecticut’s financial situation as one of growth, with state revenue in the out years outpacing Connecticut’s fixed costs, but also one in which lawmakers will face escalating non-fixed costs, union contract negotiations, and expiring federal and carryover funds that will likely leave state agencies with their hands out.

One of the primary challenges in the upcoming legislative session is dealing with $225 million in Medicaid cost overruns. Medicaid, which is part of the state’s fixed costs, is seeing higher than budget growth primarily due to increasing caseloads and costs per case.

While there has been much discussion regarding the higher-than-expected costs of extending Medicaid to undocumented children aged 15 and under, that only accounts for roughly $13 million of the shortfall, although the numbers remain unclear at this point. Despite the increase, Connecticut is still looking at a budget surplus between $122 and $190 million, according to OFA and OPM respectively.

That relatively small amount, however, will likely be eaten up quickly by growth in non-fixed costs. According to OFA’s presentation, for example, the state’s education grants to municipalities will increase by $91.7 million in 2026, and transfers from the Municipal Revenue Sharing Account and Cannabis Regulatory Fund will expire, which account for $104 million and $10 million respectively.

Furthermore, expiring federal American Rescue Plan (ARPA) dollars and carryover funds from previous surpluses have run out which will likely increase pressure on lawmakers to make up the difference. Connecticut’s state universities and community colleges system, which is facing increased costs and declining enrollment, has been actively sounding the alarm over their financial situation now that there is no more federal money.

The General Assembly will also be asked to approve a new contract with state employee unions, following four straight years of wage and salary increases. According to the budget presentation, if the next wage contract continues the wage and salary increases of the last, it will add $150.6 million to the current year budget and $281.2 million more for fiscal year 2026.

Even without the upcoming labor contract – the details of which are not known until negotiations are settled – current services are on pace to rise well above available revenue and the spending cap, setting fiscal year 2026 up to be a difficult one, according to OPM Secretary Jeffrey Beckham.

“That is the task we’ve been working on for a couple weeks at OPM, we’ve got more work to do,” Beckham said, noting that FY 27 is much easier. “Basically, we have to be on budget and comply with the caps.”

Those “caps,” like the spending cap and volatility cap, are part of Connecticut’s fiscal guardrails, which have been credited with helping get the state out of its permanent budget crisis. The guardrails have come under increasing criticism as Democratic lawmakers and special interest groups push to adjust those caps to divert less volatile tax revenue toward pension debt and free up more money for appropriations.

Lamont — backed by Comptroller Sean Scanlon, State Treasurer Erik Russell, and General Assembly Republicans — has defended those guardrails. Under the volatility cap, Connecticut has a fully funded rainy day fund and has paid down $8.6 billion in pension debt, freeing up $730 million that would have otherwise gone toward annual pension payments.

Connecticut’s total long-term debt — including pension, retiree healthcare, and bonded debt — has decreased from $95 billion to $79.8 billion over the last three years, according to Beckham. Despite the improvement, Connecticut’s debt per capita remains higher than most other states.

“We have a lot of debt compared to other states, but we’re making progress,” Beckham said.

When questioned on what the governor will propose adjusting the fiscal guardrails in his budget presentation in February, Beckham referred lawmakers to previous statements and said they would have to wait for that answer.

A recent report indicated that Connecticut’s pension pay downs will save taxpayers roughly $18 billion in pension debt payments over the next 25 years, and while those costs have generally decreased, retiree healthcare costs are expected to grow significantly in the coming years, according to OPM.

Retired state employee health costs are projected to increase from $693 million in 2024 to $1.1 billion in 2027, according to OPM’s presentation, due to increased enrollment and the federal Inflation Reduction Act, which limits Medicare Advantage patient costs, putting more of the burden on employers.

Despite those challenges, Beckham says that Connecticut is in a better position than many other states, including its own sister-states in the Northeast, as federal ARPA money dries up and revenues become volatile.

“They’re cutting spending, they’re raising taxes, they’re dipping into reserves,” Beckham said. “Difficulty is out there. We’re well-positioned. I feel pretty good about where we are in our budget development. I think we can avoid a lot of this with a lot of lengthy discussion and negotiation, but we will see.”

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