An economy on the brink of recession and 9% inflation weren’t enough to stop state government’s surplus from shattering the $4 billion mark, Gov. Ned Lamont’s budget office reported Wednesday.
The $4.3 billion surplus for the fiscal year that closed June 30 is unprecedented in state history, equals one-fifth of the last budget’s entire General Fund, and is 30% larger than the maximum budget reserve allowed by state law.
That means about $4.1 billion out of this past year’s $4.3 billion surplus will be used to pay down the state’s massive debt in its pension programs for state employees and municipal teachers. The remaining $200 million will go into the rainy day fund — elevating it from $3.1 billion to $3.3 billion, which equals 15% of the General Fund for the new fiscal year.
The latest surplus forecast also is up $430 million from estimates just one month ago, with roughly 80% of the improvement coming from rosier-than-anticipated tax receipts. Most of that final surge in revenue is tied to business taxes or to quarterly income tax filings that are dominated by capital gains and dividends.
And while major market indices like Dow Jones Industrial Average and the S&P 500 are down this calendar year, they had enjoyed considerable growth prior to 2022, driving up earnings and tax receipts in the just-completed budget cycle.
“Fiscal Year 2022 will be remembered as transformative for Connecticut’s state budget, improving our outlook for future generations,” Lamont said Wednesday.
The $4.1 billion in surplus earmarked to retire pension debt could free up resources in future state budgets for other purposes, state pension analysts noted earlier this month.
This payment, coupled with $1.7 billion in surpluses used for the same purpose in 2020 and 2021 combined, could drive the required annual pension contributions down by $440 million or more.
But whether those required payments actually drop, and by how much, also hinges on the economy. As stock markets slide, the value of Connecticut’s pension fund investments traditionally falls as well. And as those investments lose value on paper, required contributions tend to rise.
So even though there appear to be competing forces trying to push the state’s annual pension costs in opposite directions, Lamont was optimistic that — in this area of the budget — Connecticut is in for some good news in the near future.
“We are providing stability and predictability to our budgeting,” the governor said. “The national bond rating agencies have all taken notice, last year we were upgraded by all four rating agencies, and this year, one agency has improved the state’s outlook. Businesses recognize that Connecticut is committed to driving down our unfunded liabilities and looking towards our state more and more as a place to expand and grow.”
But Republicans say Lamont and his fellow Democrats in the legislature’s majority missed an opportunity this year to help Connecticut residents crippled by high gasoline prices and inflation that now tops 9%.
Democrats enacted a $660 million tax relief plan they say ranks as one of the largest in state history. But much of that aid is temporary and the GOP argues it is far too small anyway, given inflation and the huge windfall more than six times its size in the state’s coffers.
Republicans countered with a $1.2 billion tax-cutting plan that included the first ongoing cut in a state income tax rate since the mid-1990s.
The $4.3 billion left over from the last fiscal year reflects money taken “off kitchen tables across the state of Connecticut,” Senate Minority Leader Kevin Kelly, R-Stratford, said Wednesday. “Again, I ask for this over-taxation to be returned so that families feeling the hurt of the historic inflation of the Biden administration get some relief.”
But Connecticut also is one of the most indebted states in the nation on a per capita basis, and it entered this fiscal year with more than $40 billion in unfunded pension obligations — a problem created by decades of inadequate savings.