Although Connecticut’s 2017 budget crisis may have come to an end when Gov. Dannel Malloy signed the bipartisan budget on Tuesday, the state’s long-term budget crisis continues – with the 2019 budget debate promising to be as difficult or more than this year’s mess.

The nonpartisan Office of Fiscal Analysis is already projecting a $4.6 billion deficit, largely due to the rapidly rising costs of pensions, retiree healthcare, and debt service – combined with declining tax revenue. Fixed costs now consume more than 50 percent of General Fund expenditures.

Lawmakers will also have to account for a series of employee raises, which were part of the SEBAC concessions agreement.

In other words, when it comes time to fashion another budget during the 2019 session, legislators will have their hands full.

 

Although the news appears bad, Rep. Christopher Davis, R-Ellington, ranking member on the Finance, Revenue and Bonding committee, is hopeful that changes outlined in the new budget – particularly the spending cap and the bonding cap – will “play a crucial role going forward.”

“We took some helpful steps to curtail those issues,” Davis said, but he does not doubt that the next budget writing session will be challenging.

According to a report by the OFA, Connecticut’s debt service payments are projected to grow from $2 billion in 2017 to $2.4 billion by 2020, although there will be a one year decrease in payments in 2019, followed by another surge in costs.

Payments to Connecticut’s two pension systems for teachers and state employees are also projected to grow. Payments to the teachers retirement system will grow from $1.2 billion this year to $1.4 billion by 2020.

Payments to the state employee retirement system will reach $1.57 billion per year, most of which pays for the unfunded liabilities. Retiree healthcare, which now costs more than healthcare for current employees, is expected to grow to $864 million by 2019.

State employee pension payments will be moved under the spending cap in 2023, followed by teacher pensions in 2027.

While lawmakers placed some restrictions on Connecticut’s spending in this budget, other forces were at work to restrict what they could cut.

Under the terms of the SEBAC concessions deal, which was ratified in July, state employees will receive a one-time lump sum payment at the beginning of fiscal year 2019 of $117.6 million, followed by 3.5 percent raises – plus step increases – in 2020 and 2021, totaling an additional $351 million per year.

The concessions deal guaranteed layoff protections for Connecticut’s state employees through 2022, so the state will not be able to cut its workforce, consolidate state agencies, or privatize government functions. The new budget instituted a hiring freeze so some savings may be realized through attrition.

“The concessions deal kind of tied our hands,” Davis said. But Davis believes that savings can be achieved through legislating changes to state employee benefits after 2027, a plan which was included in the budget passed in September but was ultimately vetoed by Gov. Malloy.

Under that budget plan, after the expiration of the SEBAC contract in 2027, a number of changes would be made to state employee benefits, including increasing their pension contributions, capping the cost of living adjustment and removing overtime from pension calculations.

The savings generated by those changes – estimated to be $321.8 million a year – would be taken now by lowering the state’s contribution to the pension system.

SEBAC threatened a lawsuit if those provisions were included in the new budget, and Malloy vetoed the plan in late September.

Despite the lawsuit threat, Davis feels these savings are still a real possibility and could help solve the next budget crunch. “I think there would be a lawsuit for any kind of change,” Davis said. “I think this is still something we can push for.”

This year’s $5.1 billion budget deficit was met with calls for tax increases from some lawmakers as well as union leaders. A number of new or increased taxes were eventually shot down.

An increase to the sales tax, a cell phone tax, soda tax, second home tax, increased taxes on financial services and raising the top marginal income tax rate were all debated at one point or another before being pushed aside.

Despite major tax increases in 2011 and 2015, tax revenue came in lower than projected, particularly from the state’s top earners. But overall, tax revenue has flattened out. The state’s sales tax is projected to be lower; gas tax revenue is not growing enough to meet the Special Transportation Fund’s needs and led to calls for highway tolls throughout Connecticut – another measure that was eventually left out of the budget.

Malloy had insisted that the budget deficit not be solved with another major tax increase, leading to some disagreement between the governor and Democratic leaders earlier in the budget process.

Ultimately, leaders from both parties were able to work out a compromise that left major tax increases off the table, relying instead on increased fees for some state services, lowering municipal aid, and increasing Medicaid reimbursement through another tax on hospitals.

Although the governor vetoed the plan to change state employee benefits after 2027, the political landscape may change by the next budget session following the 2018 election. Malloy has said he will not run for re-election.

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