Report: Many states reining in spending as revenue growth slows

Gov. Ned Lamont and his administration have been warning legislators for months that the next budget they draft likely will require some painful choices as nearly $700 million in temporary money disappears.

And while the prospect of holding the line on overall spending — or shrinking in some areas — has many legislators worried, a new analysis from The Pew Charitable Trusts shows that many states already are tightening their belts.

Whether Connecticut will follow their example next spring remains uncertain.

Pew analyst Liz Farmer wrote that states’ general funds, which cover the bulk of annual operating costs, likely will drop 6.2% on average in the current fiscal year, which began July 1.

Citing data from the National Association of State Budget Officers , analysts attributed much of that 6% projected decline to California.

But flattening revenue growth — due in part to the tax cuts many states approved in recent years — has left 22 states likely to cut spending or at most hold the line this fiscal year. And 18 other states including Connecticut were expected to limit general fund spending growth below 5% and could be staring at cuts in the next fiscal year.

“It’s a vastly different picture from recent years,” Farmer wrote. According to NASBO, state spending rose a whopping average of 14.4% in 2023-24, and 7.2% in 2022-23.

Robust revenue growth coming out of the worst years of the coronavirus has slowed dramatically. States’ general fund revenues grew on average by more than 16% in both 2020-21 and 2021-22. But that slipped by 1.1% in 2022-23 and a 0.6% increase last year. Analysts are projecting 1.6% average growth in the current fiscal year.

The revenue growth in 2021 and 2022 led many states to cut taxes, and some may have done so too aggressively. Another reason for the spending cuts is that many states spent heavily in recent years to pay down pension and bonded debt or to pay cash for certain infrastructure projects. That activity also is slowing down as revenue growth slows.

CT’s fiscal caps complicate budget debate

At first glance, Connecticut’s revenue growth is modest as well. Lamont’s budget office and the legislature’s nonpartisan Office of Fiscal Analysis estimate general fund revenues will grow 2.3% this fiscal year.

But since late 2017, Connecticut has removed huge portions of income and business tax receipts from the budget on the assumption they are too unstable to spend — likely to come in big one year and vanish the next.

This volatility adjustment, though, has been anything but volatile. The program has captured an average of $1.4 billion annually in its first seven years — an amount greater than 6% of the General Fund — and state analysts say it will continue to collect between $800 million and $1.2 billion yearly through 2026.

The volatility adjustment collected at least $950 million in six of the seven fiscal years it’s been in existence. The only exception was 2019-20, when the pandemic’s initial outbreak temporarily shocked the economy, and the program still captured $530 million.

Critics, including many of Lamont’s fellow Democrats in the state House and Senate majorities, say the system is too aggressive and poorly calibrated, taking reliable funds out of the budget along with unstable dollars.

Lamont, a Greenwich businessman, says the program is working just fine as is and has the backing of other fiscally moderate Democrats and most Republicans in the legislature.

Connecticut has managed to pump more dollars into programs than the volatility adjustment and other budget controls normally would allow by gradually drawing down the $2.8 billion in federal pandemic relief Congress awarded the state in 2021 through the American Rescue Plan Act, commonly called ARPA.

State legislators also carried portions of annual surpluses forward from one budget to the next to bolster core programs in this fiscal year’s $26 billion state budget.

But the pandemic relief will have been largely exhausted by next spring when Connecticut officials begin work on a biennial budget for the 2025-26 and 2026-27 fiscal years.

Nearly $700 million in temporary funds currently backing programs this fiscal year will be gone in 2025-26.

Projected revenue growth for next fiscal year, not counting funds protected by the volatility adjustment, is only about $500 million.

And administration officials have been urging legislators since May to prepare for tough choices when the next regular legislative session starts in January.

“I have to remind people that ARPA is one-time money and ARPA does not go on forever,” Lamont said on May 9, two days after he and legislators agreed to dedicate the last vestiges of federal pandemic relief largely to support higher education, social services and children’s mental health programs this fiscal year.

Chris Collibee, the governor’s budget spokesman, said in June that “the administration has been clear with all stakeholders that one-time revenue should be used only for one-time expenditures, and there should be no expectation on the part of anyone that the state will pick up expiring ARPA funds” in the next budget debate.

House Minority Leader Vincent J. Candelora, R-North Branford, is urging Lamont to block any efforts to change the state’s fiscal controls, noting Connecticut has used the big surpluses they’ve helped produce to build a $4.1 billion rainy day fund and to dedicate roughly $8.5 billion to reduce pension debt.

The state entered this year with more than $37 billion in unfunded pension obligations, a huge problem created by more than 70 years of improper savings prior to 2011.

“I’m anticipating a complete raid on all of the [fiscal] caps,” Candelora said.

Republicans have insisted legislators could find greater efficiency savings in higher education and transportation, should stop expanding Medicaid programs to serve undocumented residents and should curb recent healthy raises for state employees, which have hovered around 4.5% annually since the 2021-22 fiscal year.

Connecticut has many years to go to climb out of the pension funding mess it created over 70 years, Candelora said. “There has to be a recognition of where we are,” he added. “The Democrats have to do soul-searching.”

But Sen. Cathy Osten, D-Sprague, co-chairwoman of the Appropriations Committee, says the state’s social service safety net for people with disabilities, patients grappling with mental health or addiction issues, and elderly and other vulnerable residents is badly underfunded and cannot absorb more cuts.

Others on her panel argue that community colleges and many other aspects of the higher education system are in similar shape.

Osten and other Democratic leaders say the state can modestly adjust its savings efforts to bolster core programs and still balance its books and pay down extra pension debt.

“I don’t think we need to have cuts right now,” she said. “There are things that government needs to do.”