By Kevin McNabola
Orange Board of Finance
Kevin McNabola
As we put 2022 in the rear view mirror, Connecticut is in the best fiscal shape in over two decades. But is it sustainable?
Connecticut finished fiscal year 2021 with a $4.3 billion surplus and with a projected surplus of $1.3 billion in fiscal year 2022 driven by a strong stock market, surging state income and business tax receipts. The state has positioned itself to finally be on strong financial footing.
Connecticut has also taken the right steps to manage its long-term financial obligations, including paying down close to $6 billion in pension debt and at the same time building up the rainy day fund to $3.3 billion.
Based on market performance in 2022, the question becomes: is it enough? This past year saw some of the worst financial results since 2008 with the S&P 500 down 19 percent and the Dow Jones down 8.8 percent. The 10-year treasury, which influences everything from mortgage rates to student debt, hit a high of 4.25 percent in late October (the highest since 1991) from a low of 1.5 percent in 2021. The Federal Reserve increased rates seven times from 0.25 percent to 4.5 percent, with another expected rate increase of 0.25 basis points in late January.
As the market volatility continues into 2023, Connecticut now prepares to face a new challenge preparing for the impact of major losses within stocks, state income and tax receipts. These are major revenue components within the budget, and Connecticut is already projecting budget deficits in 2024 and 2025.
Compared to states like Illinois and New Jersey, Connecticut has been proactive in its commitment to structural budget balances and addressing the state’s long-term debt. These debts include bond debt, pension and other postemployment benefit liabilities. The cost of serving pension debts will continue to weigh on Connecticut in the near future due to the size of the burdens.
However, Connecticut has started the process of paying down on its obligations and is better positioned than most states. The forecast for 2023, with continued inflationary pressure on energy prices and commodity prices, will further dampen financial performance and expectations at both the state and local levels. As the housing market cools off, we can expected to see lower conveyance tax revenues for local municipalities. An average of 18 percent lost in asset portfolios within city pensions will increase the annual required contributions, creating additional budgetary pressures.
The importance of proper budgeting for state and local finance managers will play a critical role this year because state and local revenues will most certainly have to be adjusted to reflect the fiscal realities and budgetary pressures that lie ahead in 2023 and 2024.
Here in Orange, the Board of Finance for the 2023-24 budget will also have to factor in the loss of $700,000 in revenue from Amity High School that had been budgeted within several prior budgets based on significant surpluses within the Amity High School budget. On the expense side of the budget, we can expect to see increases in health care and pension costs, along with higher employee wage increases, which are driven primarily by short supply and higher demand for a skilled labor force.
Kevin McNabola is the chief financial officer for the City of Meriden and a member of the Orange Board of Finance.