Lawmakers on the state’s budget-writing committees heard sunny projections from fiscal analysts Tuesday who, after temporary federal aid drops off, expect to see state revenues outpace fixed costs for the first time in years.
The Appropriations and Finance, Revenue and Bonding Committees welcomed financial updates during a morning hearing from the legislature’s Office of Fiscal Analysis and Gov. Ned Lamont’s budget agency, the Office of Policy and Management.
Legislators on both sides of the aisle noted optimistic trends in Connecticut’s budgetary outlook. At the moment, the state is projected to close fiscal year 2022 with a nearly $895 million surplus, driven in large part by rising sales and use tax revenues and federal grants and reimbursements, Office of Policy and Management Secretary Melissa McCaw said.
After a period of suppressed spending during the pandemic, sales tax revenues grew by a striking 10% in fiscal year 2021, Office of Fiscal Analysis Director Neil Ayers said.
“Usually sales tax is a pretty vanilla, steady, about 2% most years, growth revenue stream. As you can see it’s gotten a little interesting,” Ayers said. “This is largely due to federal stimulus checks, people had more available disposable income. There was strong consumer spending on taxable goods.”
But while analysts identified more encouraging news, it lies on the far side of a speed bump: the two-year state budget relies on around $1.75 billion in pandemic related federal support that will drop off after 2023. The shortfall contributes to a billion deficit in fiscal year 2024. And in some cases, lawmakers may find themselves pressed to support spending increases propped up by federal funds, Ayers said.
“Some of these entities that are utilizing these dollars in ‘23 might have an expectation of them in ‘24,” Ayers said. “Those dollars are not built into our budget as potential ongoing expenditures. So that may be some pressure that you may be feeling, not this session but next year and the next biennium budget.”
However, beginning in fiscal year 2025, projected state revenue begins to outpace its fixed costs. Ayers said reductions in fixed costs were largely driven by supplemental payments on its unfunded pension obligations.
With the rainy day fund flush above its $3 billion limit, the state contributed $1.6 billion at the end of fiscal year 2021 to pay down debt. Ayers said current projections expect the state will make $2.8 billion in similar deposits before the end of the current biennium.
“I’ve been doing this a few years now and I can say it’s a long way from 2017, when we were looking at $2.5 billion deficiencies as far as we could see and we had $200 million in the rainy day fund,” he said.
Projections even expect the state’s typically threadbare Special Transportation Fund to run surpluses in each of the next five years. Ayers said the fund’s excess dollars are expected to grow from about $241 million in the current year to about $1.2 billion in fiscal year 2026.
The expansion has so far been driven by temporary federal support and motor vehicle sales tax revenue. The fund will further benefit from a new highway use tax on tractor trailer trucks, which the legislature passed this year and will take effect in fiscal year 2023.
“In a nutshell, both the General Fund and the Special Transportation Fund are looking pretty well,” Ayers said.
Democrats and Republicans on the committees seemed optimistic about the state’s finances. Sen. Cathy Osten, co-chair of the Appropriations Committee, said the projections put the state in a position to make further investments in its unfunded pension obligations.
“That seems to me the best news that we could have, relatively speaking,” Osten said.
Rep. Mitch Bolinsky, R-Newton, praised the Appropriations Committee as having judiciously spent the one-time federal revenues. But Bolinsky and other Republicans worried that the state’s boost in revenues were driven in part by historic rates of inflation. He suggested scrapping the new highway user tax before it kicks in.
“That truck tax is going to contribute to the cost of goods bought, sold to the economy and will have direct consumer impact as something that we can control, versus inflation, which is something that we cannot control,” Bolinsky said.
McCaw, the governor’s budget director, said lawmakers were free to discuss the tax during their next session. But she said the transportation fund’s long term solvency was still a concern and state revenue was needed to qualify for grants under the recently-passed federal infrastructure spending package.
“We are going to have to leverage the infrastructure dollars. It’s an unprecedented opportunity to make investments across the state,” McCaw said.