Dan Haar: CT's latest surplus heralds end of 'permanent fiscal crisis'

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Quietly, with no sweeping declarations, two state agencies issued reports late Friday that herald the end of a grim era for Connecticut.

The reports showed good news on the state budget front: The regular surplus for this fiscal year has now hit $1 billion, more than double the October total as estimates of tax collection are up and spending in some areas is down.

On top of that, the state’s rainy day fund is expected to overflow by $1.8 billion before June 30 – money from capital gains and dividends that isn’t part of the regular spending stream.

None of this year’s $2.8 billion windfall, building on last year’s $5 billion overage, comes as a surprise.  Since mid-2020, we’ve seen a drumbeat of optimistic updates from the two agencies -- the nonpartisan Office of Fiscal Analysis (OFA) in the legislature; and the governor’s budget office, known as the Office of Policy and Management, or OPM.

But the new reports also show something we have not seen in more than a decade: Stretching out to at least 2026, the Connecticut’s ice-grip overhang of liabilities – expenses such as pension payments, Medicaid and employee and retiree health care – is finally under control.

No more doomsday deficits dangling bloody red ink over our collective political heads. Wow. 

With three in-the-black numbers for fiscal 2024, 2025 and 2026 – highlighted on the cover of the latest OFA report -- the “period of permanent fiscal crisis in state and local government” has, as I see it, come to a close. The endless crisis was announced with those words in November, 2014 by former OPM Secretary Ben Barnes – though it had started long before that.

In budget-speak, the agencies say growth in state revenue over at least the next three years – taxes, basically – will exceed growth in so-called “fixed costs” such as the big items I mentioned, which have caused the years of pain.

Translation: Connecticut is bringing in enough money to feed the family and pay the bills – including the mortgage and that scary credit card overhang -- without having to borrow from Uncle Fred or drive on bald tires.

Meaning, the “permanent fiscal crisis,” the era of perpetual tax hikes, state service cuts, hiring freezes and demands for state employee givebacks, is over. Or so we hope.

As an exclamation point, on Monday Standard & Poor’s upgraded Connecticut’s credit rating.  S&P and the other two chief Wall Street rating agencies raised the state’s scores in 2021 for the first time since 2001, before the 9/11 attacks.

As with all things economic, there is always an “on the other hand” to worry about.  Connecticut’s long-term liabilities remain huge, in the range of $90 billion. If we hit a recession or if Gov. Ned Lamont and the Democrat-heavy General Assembly push too hard on spending, all bets are off.

But unlike in 2009, we’re prepared for a recession this time around with a $3.3 billion rainy day fund. And even if we overspend on programs – which won’t happen if the cautious Lamont has his way -- we can adjust more easily than in the days when fixed costs hung over us like a knife on a string.

A moment to celebrate

If you already miss the drama, take heart. None of this means hard choices and budget battles are over.

Connecticut government has no shortage of non-fixed costs, countless programs like expanded child care, municipal aid and improvements to higher education. If increases in those costs exceed our ability to pay, we’re back under the blade.

For example, we have launched tens of millions, maybe hundreds of millions of dollars in programs financed by federal pandemic relief cash that runs out next year. If we want to continue those, or if we want to cut the state’s very high taxes, we need to find the money.

Still, we should take a moment, just a moment, to celebrate the end of the permanent crisis.

“That is a great achievement that we’re very proud of, very happy with,” said Jeffrey Beckham, Lamont’s budget chief as secretary of the Office of Policy and Management.

For a variety of reasons, those fixed costs “have been inexorably going up and up and up,” Beckham said, outpacing our ability to pay for them without painful actions like tax hikes and service cuts.

Now, for a different set of reasons, the vicious cycle has finally morphed into a more virtuous one, where an improved state budget picture leads to a stronger economy and attracts residents and businesses, which in turn improves the fiscal picture.  

Beckham corrected me when I suggested that “structural deficits” – the state’s inability to cover the costs of all current services – are also over.  Lamont’s budget proposal in February will still bring hard choices. Still, easing the chokehold of fixed costs from debt, entitlements and obligations is the key.

“No one around here can remember when that was the case,” Beckham said.

The roots of a turnaround

What caused the change? It starts at the depth of the crisis.

In 2011, as Connecticut struggled to emerge from the Great Recession, former Gov. Dannel Malloy won office and inherited a projected budget gap of $3.7 billion per year that he had to fill, plus a $900 million debt from money the state borrowed just to stay afloat.

Mandatory pension payments were rising after decades of both parties delaying payments, like a cash-poor family digging deeper into high-interest debt.

Malloy’s first big tax hike and employee concession came that same year. By November of 2011, the annual budget predictions called for clear sailing – surpluses as large as $700 million by 2016.  

Quickly, reality struck:  Labor savings didn’t happen as planned and mostly, the state’s economy hit a deep freeze as the rest of the nation recovered.

Year after year, predicted shortfalls ranging from $400 million to $2.7 billion weakened Connecticut, causing Barnes, the Malloy budget chief, to make that comment about a permanent crisis.

But Malloy and Barnes slowed the growth of agency spending to almost zero after huge spending runups under two previous governors.  We can argue forever about whether their multiple rounds of employee givebacks were enough; they are having a positive effect on today’s budgets.

Malloy left Lamont with a rainy day fund at $1.7 billion, up from the goose egg he inherited, although economic growth and healthy tax collection remained elusive.

“I think we laid the appropriate foundation for what others have been able to execute extremely well,” Malloy told me Sunday, in a phone interview. “I’m glad to have played a part.”

Tax cuts vs. investments

In the fall of 2017, with a budget deal four months overdue, Republicans and Democrats in the legislature reached a landmark agreement under which tax collections over a certain threshold from capital gains and dividends, which rise and fall dramatically, could not go into the regular budget for spending. That money had to go directly into the rainy day fund.

That (along with a hedge fund tax rule change in 2020) has led to the big surpluses amid the Wall Street runups. Seeing these excess revenues, and remembering Lamont’s roughly $400 million in tax hikes in 2019, Republicans want bigger tax breaks. They say the government is healthy while the citizens struggle. They’re not wrong. 

Lamont has poured every available dime into those badly underfunded pension funds for state employees and teachers. He has deposited $5.7 billion already, saving taxpayers $485 million a year in pension costs for the next 25 years – a tax cut that helps solve the budget puzzle. 

Some Democrats, especially after prevailing big-time in the elections, say this is the time to cut into the inequities that cause so many families to fall behind. Rep. Toni Walker, D-New Haven, House chair of the appropriations committee, named higher education, state support for struggling school districts and a shortage of nurses at the state Department of Mental Health and Addiction Services.

“We have a lot of lapses in there that are not comfortable for me and a lot of them are generated by unfilled positions in government,” Walker told me Monday, referring to frozen agency spending – lapses – as a pervasive cost-saving measure.  

Walker isn’t clamoring for whole new ways of spending money.

“I don’t know about new programs, I have to see what the requests are. But I am concerned about the existing programs,” she said.

The pandemic effect

All of this is complicated by the pandemic relief money, which has flooded into Connecticut and all other states. State coffers received $2.8 billion for projects to shore up the economy, plus direct costs for testing and other protections against the virus.  Cities and towns received, or will receive by next year, another $3.1 billion.

Private citizens received billions more.

Some say all that federal money is what ended the state’s fiscal mess. To be clear, very little of it – none last year and $315 million this year, far less than the surplus – is being used in the regular state budget. But of course, all that cash has improved the economy and that has led to higher collections for the sales tax, the state income tax and the tax on corporate profits.

We can’t know what will happen next year or the year after. Remember, at the height of the coronavirus shutdown, some economists predicted a state budget collapse and the opposite happened.

Two factors stand in Connecticut’s favor: First, the predicted gains in tax collection are modest by historic standards, in the range of 2.9 percent a year, and even that is enough to cover the state’s fixed costs. More would be a bonus and would assure new tax cuts.

Most important, people have moved into Connecticut from other states since the pandemic. If that continues, the state wins. If it reverses back to the old pattern of exodus, we lose.