Brand new CT budget already plagued by $170 million hole

There’s bad news and good news about the new state budget.

The bad news: Just one month into the fiscal year, the $26 billion plan already has sprung $170 million in leaks, driven largely by growing Medicaid and retirement benefit costs.

The good news: State officials still expect to close the fiscal year next June with more than $1.3 billion left over.

How this apparent contradiction can exist lies with how the General Assembly and Gov. Ned Lamont tried last May to live within complex budget controls last spring while still finding hundreds of millions of dollars in extra funding for higher education, social services, children’s mental health and child care.

Those budget controls, which Lamont and other supporters call “ fiscal guardrails ,” cap spending and force legislators to build a hefty operating surplus — a cushion against cost overruns — into state finances. Still another provision takes a huge portion of quarterly income and business tax receipts out of the budget on the grounds they are too unstable, likely to surge one year and vanish the next.

Complying with all those rules while dedicating extra funds for core programs in 2024-25 simply didn’t work mathematically.

Officials solved part of the problem by dedicating to core programs the final $370 million left over from the $2.8 billion federal pandemic grant Congress awarded Connecticut in 2021 through the American Rescue Plan Act. These ARPA dollars can be spent outside of the budget and, therefore, beyond the scope of the fiscal guardrails.

They also transferred about $100 million from the outgoing fiscal year’s surplus to help support spending in 2024-25.

But legislators didn’t have enough funding to bolster core programs and address projected cost overruns in Medicaid and payments to various retirement benefit programs.

Instead, lawmakers and Lamont effectively ignored them.

A preliminary $26 billion budget for 2024-25 had been adopted in June 2023 as part of the state’s biennial budgeting cycle. But normally that preliminary draft is revised, and any issues — such as the Medicaid and retirement benefit expenses — are addressed by shifting funding around or increasing the bottom line.

But state officials did neither, noting only that the preliminary budget they passed in June 2023 was in balance — when it had been adopted 12 months before it was supposed to take effect.

They pointed out that the preliminary budget includes a $300 million built-in surplus to guard against unanticipated expenses. And the program that forces legislators to save volatile revenues outside of the budget is projected to capture $1.2 billion this fiscal year. Those funds could be used to close any deficits if that precautionary measure wasn’t sufficient.

And now, just one month into the fiscal year, the legislature’s nonpartisan Office of Fiscal Analysis reported that the $300 million built-in surplus has been whittled down to $129 million, largely due to the same Medicaid and retirement benefit issues that officials knew about back in May.

Cost overruns would have eroded the built-in surplus all the way down to about $55 million, had the treasurer’s office not found savings in required payments on bonded debt.

But minority Republicans in the House and Senate cried foul this week, arguing Connecticut has a legal obligation to adopt a balanced budget. That means, GOP leaders added, addressing all anticipated expenses. Savings from the various budget controls are supposed to be kept until the fiscal year ends and then used to increase the budget reserve, or rainy day fund, and to pay down Connecticut’s massive pension debt, which exceeded $37 billion entering 2024.

“It runs contrary to the spirit of the guardrails,” said Senate Minority Leader Stephen Harding, R-Brookfield, who noted Democrats and Republicans alike voted unanimously in February 2023 to renew that system of budget controls for another five years.

“Their desire to spend is really insatiable,” House Minority Leader Vincent J. Candelora, R-North Branford, said of the Democratic majority, adding he’s particularly disappointed that Lamont, also a Democrat, went along with this approach, given his frequent public praise of the budget controls.

Candelora said he spoke with Lamont in early May about this budgeting approach, telling the governor “You don’t want your fingerprints on a document that we know is not in balance.”

Lamont’s budget spokesman, Chris Collibee, said this week that “the administration is closely monitoring revenue and expenditures for [the current fiscal year].”

Collibee did note that the legislature expanded Lamont’s authority to find savings among most agencies and departments throughout the fiscal year to help keep the books in balance. But the administration has said it won’t use that power to reduce funding for public colleges and universities, one of the legislature’s top priorities this year.

Is CT saving too much?

Democratic legislative leaders said this week that the problem ultimately involves budget controls that mandate excessive savings.

Connecticut recently achieved a record-setting $4.1 billion rainy day fund equal to 18% of the General Fund, the maximum allowed by law.

The state has also used another $7.7 billion from surpluses since 2020 to pay down pension debt and will dedicate another $850 million to reduce those unfunded liabilities this fall.

“We have to strike a balance, and anybody who looks at these numbers and is worried or concerned is just not being honest,” House Speaker Matt Ritter, D-Hartford said.

Growing numbers of legislators have said aggressive state savings efforts since 2017 have been leeching vital resources from education, health care, social services and other core programs. Lawmakers can scale back these savings efforts somewhat, bolster services, and still balance the books and pay down pension debt, they say.

“It has become sort of unsustainable and is creaking under its own weight,” said Senate President Pro Tem Martin M. Looney, D-New Haven, who says the “fiscal guardrails” are more like a budgetary “straitjacket” at times.

Connecticut had to make tough choices in 2017 after a string of deficits and a tiny budget reserve.

“It doesn’t make sense any longer to say we can ignore current needs because we have to worry about the rainy day fund and pension debt,” Looney said.