State faces larger deficit than predicted

HARTFORD — Nonpartisan legislative budget analysts reported Wednesday that Connecticut will end the fiscal year with a $29.7 million deficit. That’s higher than the $19.6 million deficit Gov. Ned Lamont’s budget office issued hours later.

Part of what’s driving the deficit projections, according to the Office of Fiscal Analysis, are tax refunds totaling approximately $100 million and agency deficiencies totaling $84.3 million. The deficiencies are spread out among seven state agencies, according to the Office of Fiscal Analysis. The budget adopted in June had a $141.1 million surplus when it started in July.

“No one should be surprised that the estimated budget surplus of $140 million would be wiped out by a combination of spending increases, falling revenues and policy changes such as increased tax refunds,” House Minority Leader Themis Klarides, RDerby, said. “This is just more evidence of how precarious our budgets can be.”

The Office of Policy and Management headed by Secretary Melissa McCaw believes revenues are going to be below projections by about $84.5 million and spending will exceed the budget by $76.2 million.

Meanwhile, OFA says the surplus for fiscal year 2021 is estimated at $183.3 million, which is a slight improvement over the $166.2 million projected when the budget was adopted. However, that surplus is followed by three more years of deficits totaling $757 million, $1.2 billion and $917 million.

On the revenue side “collections data for the newly established, 10cent fee on singleuse plastic bags indicates annual revenues of $7 million, rather than the approximate $28 million revenue included in the budget, resulting in a negative adjustment of $20.7 million,” OFA stated in its budget projections. “Sales tax revenues have outpaced expectations since consensus revenue estimates of April 30, 2019, contributing to a positive adjustment of $46.8 million, which partially offsets the negative impact of the adjustments described above.”

On the spending side the Department of Social Services is running a $31.2 million budget deficit, the Department of Correction deficit is estimated at $10.6 million, the Department of Mental Health and Addiction Services is $1.5 million, and the Department of Emergency Services and Public Protection is running a $300,000 deficit.

Legal claims and fringe benefit accounts are also running deficits of $27 million and $11.9 million, respectively.

In fiscal years 2022 and 2023 fixed cost growth is estimated to exceed revenue growth creating a structural imbalance in those years.

According to OFA’s report: “Over this time fixed cost growth is only $29.4 million more than revenue growth; a seemingly small structural imbalance. However, the average growth rate for revenue is 2.5 percent while the average fixed cost growth rate is 4.8 percent. This means that 100 percent of revenue growth is needed to cover fixed cost expenditure growth, which is 50 percent of budget expenditures.”

General fund fixed costs are projected to grow in the out years from approximately $10 billion in fiscal year 2021 to approximately $11.5 billion in fiscal year 24; a total increase of $1.5 billion.

OFA projects an average annual growth rate of 4.8 percent in fiscal years 2022 through 2024 across all general fund fixed cost expenditure categories.

Overall annual debt service growth is estimated to be 6 percent from 2021 to 2024, according to the report.

“It takes several years to fully realize the impact of bonding decisions on debt service,” OFA wrote. “Approximately 90 percent of the FY21 debt service payment is based on debt that was incurred prior to FY20. The growth from the issuance of new bonds, as described above, has been limited by several recent bonding policies, including slowed capital spending beginning in CY17 and the current Governor’s reduced capital use.”

However, “To date, no bond package has been adopted in calendar year 2019, which has a major impact on the ability to project current and future bond use. The projected authorizations for the biennium are based on the amounts proposed by the Finance, Revenue and Bonding Committee when a bond bill was approved by the committee in May. If no bond package is adopted during the biennium, estimates for all capital use

would decline substantially from the figures in this report.”

As of today, the state has borrowed $1.1 billion this year for capital projects. There’s one more State Bond Commission meeting scheduled in December.

The Rainy Day Fund, according to OFA, is estimated to reach $2.9 billion by the end of this fiscal year. OPM is predicting it will reach $2.8 billion by the beginning of 2021.

OFA estimates $3 billion will be needed in the Rainy Day Fund to offset the revenue loss associated with a recession.

Currently, the Rainy Day Fund has $2.5 billion in it, which is the largest balance in its 36year history.

The State Treasurer must apply all funds over the 15 percent Rainy Day Fund cap to the State Employees’ Retirement System, the Teachers’ Retirement System, or both, to reduce these systems’ unfunded liabilities under the new budget rules adopted as part of the 2017 bipartisan budget.