CT now sitting on $4.1 billion budget reserve

When state legislators increased the amount of taxpayer dollars Connecticut can hold in reserve, they envisioned it would take several years for government to reach that limit.

It took 12 months.

With Connecticut’s rainy day fund now projected to approach $4.1 billion — seven years after it held about 1/20 ^th of that total — calls to reassess what many call the state’s aggressive savings programs continue to grow.

Gov. Ned Lamont’s budget office estimated late last week that Connecticut closed the fiscal year that ended June 30 with more than $1.64 billion left over. The first $789 million of that windfall will lift the $3.3 billion reserve from 15% of the General Fund to the new legal maximum of 18%. The remainder, slightly more than $850 million, will be used to pay down pension debt.

The latest surplus estimate is significantly larger — by nearly $300 million — than Lamont’s budget office projected on June 20 , 10 days before the fiscal year ended.

Final numbers won’t be reported until after Comptroller Sean Scanlon’s office audits the books in September, but the administration says that surging revenues account for about 80% of that bump. Quarterly state income tax receipts, which largely involve capital gains and other investment earnings, alone are responsible for about half of the latest surplus increase.

“It’s great news,” said House Speaker Matt Ritter, D-Hartford, who added that robust reserve eventually will shield education, health care, social services and other core programs whenever the next recession strikes. “There will come a day when that Budget Reserve Fund stops state government from making massive budget cuts.”

But Ritter and other majority Democrats in the House and Senate also have questioned whether state government has been saving too aggressively since late 2017, when it first adopted a series of caps and other budget controls that Lamont and other supporters have since dubbed “fiscal guardrails.” Many core programs suffered not only during the 2010s — when deficits were frequent — but also for the prior decade or two as cash-starved pension systems demanded a larger share of the overall state budget.

Ritter proposed the higher rainy day fund limit — which began with the 2023-24 budget year — as a compromise with Lamont and other fiscal moderates and conservatives. In exchange, the smaller of two mandatory savings programs built into the state budget was scaled back modestly.

But by this past spring, many critics were saying the “guardrails” need a larger adjustment, though no one has proposed repealing them. The most aggressive savings program, which is supposed to bar legislators from spending only “volatile” income and business tax receipts — those that might surge one year and vanish the next — instead has been very reliable, grabbing an average of $1.4 billion annually in its first seven years and never less than $530 million in a single year.

And if analysts’ latest projections are correct, the volatility adjustment will capture hundreds of millions of dollars annually — without failing once — through its first 11 years, taking in an average of $1.2 billion per year between 2018 and 2028.

That volatility adjustment was responsible for more than $1.3 billion of the recent $1.64 billion surplus.

Legislators, who couldn’t touch those funds, assigned the last $510 million of expiring federal pandemic relief to bolster higher education, child care, mental health services for kids and other social services in the 2024-25 fiscal year.

After that, though, state funds must be found to supplant those vanishing dollars, or programs face big cuts.

“There is going to have to be a reckoning and realization that there are things that need additional funding” in the next two-year budget cycle, Ritter said. Legislators and Lamont begin work on that plan next February.

The Democratic governor has opposed any change to “fiscal guardrails,” arguing they are working well.

Lamont’s budget spokesman, Chris Collibee, noted this will be the sixth consecutive year that Connecticut has used budget surplus to whittle down its pension debt.

Including the portion of the latest surplus headed for the pension systems, Connecticut will have made $8.5 billion in supplemental contributions since 2020. But the problem is far from solved. The state entered this year with more than $37 billion in unfunded pension obligations, an enormous mess created by more than 70 years of improper savings between 1939 and 2010.

“The state’s financial position is the best that we have seen in decades,” Collibee said. “Our collective responsibility is to maintain this position and continue to deliver for the residents of the state.”

Wall Street credit rating agencies also have praised Connecticut officials for the fiscal controls, upgrading the state’s rankings, which helps to reduce borrowing costs.

Lamont, who also insists that most state programs and services are receiving strong funding, has support from minority Republicans in the House and Senate when it comes to keeping budget controls at their current settings. Leaders of both GOP caucuses say legislators should focus more on finding ways to cut spending than seeking to scale back savings efforts.

The governor hasn’t said whether he’ll seek a third term in 2026. Labor unions, a key part of his Democratic Party base, argue the savings programs are too aggressive, weakening public services and leaving state agencies dangerously understaffed.

“Our public colleges and universities are at risk of collapsing under tuition hikes and program cuts,” said Drew Stoner, spokeswoman for the State Employees Bargaining Agent Coalition. Tuition for community college students this fall, for example, will be 11% higher than it was in 2022.

“Social services are turning away patients in need, and staffing shortages in both health care and public safety are putting the general public and staff at risk,” Stoner said. “The list goes on and on.”

Connecticut for All, a coalition of more than 60 grassroots labor, faith and other civic organizations, also is pressing for fiscal reforms.

“Every month now, we are met with new evidence that shows how Gov. Lamont’s short-sighted fiscal controls are deepening racial, gender, and economic disparities,” said Norma Martinez-HoSang, director of CT For All. “While he touts financial stability, families are struggling to get by. Lamont needs to start caring more about the hard-working residents of Connecticut rather than the creditors on Wall Street.”