Two fiscal reports released Tuesday offer a sobering glimpse of the budget challenges lawmakers face when they return in January.
The report from the governor’s budget office projects a state budget deficit of $1.3 billion for the next fiscal year. A separate report from the legislature’s nonpartisan Office of Fiscal Analysis indicates that the state’s fixed costs have increased from 37 percent of the budget in 2006 to 53 percent in 2018 based on increased pension benefit costs and increased state bonding.
Republican legislative leaders questioned whether either report captured the full scope of the fiscal problems because the reporting method was changed in May. Tuesday’s reports don’t include information about projections regarding current spending and what that spending would look like with inflation. There were also no surplus or deficit figures for the next three years or municipal spending estimates, which were features in past reports.
“This report shows us what would happen if the state only funded the absolute bare-bones of our budget,” Senate Republican Leader Len Fasano, R-North Haven, said. “Even this austere projection still leaves us with a budget deficit of $1.3 billion in the next fiscal year. That’s not even including things like inflation and promises the state has made to our municipalities and private providers.”
House Minority Leader Themis Klarides, R-Derby, said she is “questioning the methodology” in the governor’s report because it “ignores reality.”
“The state goes from a $1.3 billion deficit for the coming fiscal year, to a moderate deficit the next and no deficit whatsoever in the so-called — out years. It defies logic,” Klarides said.
Regardless, of what the reports include, the information contained shows a dramatic increase in the fixed costs, which will crowd out spending on programs and services for residents.
This year the state will be paying $257.4 million more than it did last year on debt service, $78.4 million more for state employee pensions, $278.3 million more for teacher pensions, $206.3 million more for post-retirement benefits, and $246.7 million more for Medicaid. With revenues down $189.7 million, the state is facing a nearly $1.3 billion deficit in fiscal year 2017, according to estimates.
The rise in fixed costs has also contributed to three of the four Wall Street rating agencies downgrading Connecticut’s bonds this summer.
“The dramatic increase in fixed costs also shows how a significant part of our state budget can no longer be used to fund social services and programs for those in need,” Fasano said. “This report shows the devastating truth that Connecticut can’t pay for core government services if we continue on the same path we’re on now.”
The reports were released after the state Bond Commission meeting, which has now borrowed $2.68 billion this year.
Fasano has continued to push to do a budget mitigation package to help erase the deficit before it gets bigger, but has been largely dismissed by Democratic lawmakers and Gov. Dannel P. Malloy. The legislature doesn’t have to deal with the deficit until it’s 1 percent of general fund revenues and at the moment it’s far shy of that number.
Malloy is in the process of putting together a two-year budget that he will release in February.
“There’s no doubt there has to be consolidations and adjustments in this budget,” Malloy said Tuesday before the budget reports were released. “There have to be if we’re going to honor our long-term obligations, which have come due during my administration.”
Malloy told reporters Tuesday that if anyone is to blame for the historic tax increases he implemented in 2011 and 2015, it was his predecessors who pushed off paying down the pension debt to what ended up being his administration.
“Over the course of my administration, we’ve had to pay the bills of other administrations and that continues to drive our expenditures,” Malloy said.
The governor said he doesn’t believe the general public understands that he’s not expanding government as revenues continue to fall short and fixed costs continue to increase.
If the state does nothing to address its unfunded pension liabilities the annual payment to the state employee pension fund will increase dramatically until 2032.
“I don’t think the state can put $6 billion into the pension plan,” Malloy said. “So we have to take the steps necessary to increase the obligation on a yearly basis. I’ve done that. Continue to increase the yearly obligation over time, but get to a higher level of contribution and extend that for a period of time necessary to bring everything into alignment.”
As far as taxes are concerned, Malloy said he will look at changing some taxes this year to make the state more business-friendly, but doesn’t plan on any major tax hikes. That means deeper spending cuts are on the horizon for programs and services.