Connecticut’s Fixed Costs Drive Budget Deficit in 2020 and Beyond

Connecticut’s new governor and legislature will barely have time to set up their offices before facing down a $1.9 billion budget deficit for fiscal year 2020, followed by $2.5 billion deficit in 2021.

So, what are some of the major cost-drivers of Connecticut’s budget deficit in FY 2020?

Connecticut’s deficit is being driven by a combination of lower projected revenue, statutory programs restarting, and increasing government costs — particularly Connecticut’s fixed costs, which are comprised of pension payments, retiree healthcare, Medicaid, debt service and adjudicated claims.

Fixed costs now consume more than half of the state’s budget every year.

These costs, combined with 3.5 percent raises for state employees in 2020, increased costs for Connecticut’s residential group homes and municipal restructuring, will increase government spending by $885 million in FY 2020.

The cost of teacher pensions will see the biggest increase, growing $163.4 million, followed by debt service costs for both the General Fund and the Special Transportation Fund, which will grow $213.3 million combined.

Medicaid spending is set to increase $123.9 million.

State employee pension costs will grow another $91.4 million and retiree health service will increase by $18.3 million.

In total, Connecticut’s fixed costs will rise $610.3 million in one year.

The raises for state employees will add $143.7 million in spending. The raises were approved as part of the 2017 SEBAC concessions agreement and will be followed by another 3.5 percent increase in FY 2021.

The SEBAC agreement also guaranteed layoff protection for state employees until 2022, so the next government will not be able to reduce the size of the state’s workforce. That could mean the state will have to cut from other areas of government.

Municipal aid is the second largest state expenditure behind labor, and municipalities may find state education funding held flat or, in some cases, reduced in order to deal with the ongoing deficits.

Connecticut faced a small deficit for FY 2019 but was able to mitigate the loss when quarterly tax revenue jumped due to federal tax changes and gains on Wall Street, but both Gov. Dannel Malloy and Connecticut Comptroller Kevin Lembo have warned these are likely one-time revenue increases.

Most of those gains were placed in the state’s Rainy Day Fund under the state’s new volatility cap, boosting Connecticut’s reserves to over $1 billion, however the fund remains below the 15 percent of budget recommended by Lembo.

Connecticut has used its reserve fund to bridge budget deficits in the past, but even with the Rainy Day Fund higher than it has been in a decade, it will not be nearly enough to close the gap.

Connecticut’s budget deficit will increase to $2.5 billion in FY 2021, meaning the new governor and legislature will have to solve a nearly $4.5 billion biennial deficit off the bat, but budgetary troubles don’t end there.

According to projections by the Office of Fiscal Analysis, the following biennium will be struck with a massive $6.9 billion deficit.

The state’s unfunded pension liabilities will cause continued growth of the state’s pension contributions, which are projected to increase from $2.7 billion this year to $4 billion by 2023, according to the report by the Commission on Fiscal Stability and Economic Growth.

Connecticut’s total unfunded liabilities and debt amount to $87 billion using the state’s current valuations.