Officials try to improve state government’s savings habits

With the largest budget gap in Connecticut history looming just 12 weeks away, state government doesn’t have any money to save right now.

But that hasn’t stopped state officials from debating how to reform government’s savings habits to steer clear of more fiscal potholes down the road.

Should government be allowed to keep as much as 15 percent of its annual operating costs in reserve? How about 30 percent?

Maybe the state should make monthly deposits into its emergency reserve rather than waiting until the fiscal year’s end to see what is left?

And is it better to put surplus dollars in the bank, or use those funds to pay off one of the largest debt burdens of any state in the nation?

“Any way we can do it, any way we can do a better job saving is important,” said Lt. Gov. Nancy Wyman who, as state comptroller through 2010, spent much of her 16-year tenure pushing for savings reform.

If there is a silver lining to the deficit projected at $3.2 billion to $3.67 billion for the fiscal year that begins July 1, it is the motivation it provides the legislature to make changes that seemed unnecessary during rosier times, Wyman said.

The lieutenant governor noted that the state’s emergency budget reserve, commonly known as the Rainy Day Fund, had been limited to 5 percent of annual operating costs until the economic downturn between 2001 and 2003.

The emergency reserve was filled to its legal limit entering the 2001-02 fiscal year at $595 million. But government tore through the reserve in 10 months and still needed to borrow $219 million to close the books that fiscal year and another $98 million to cover expenses in 2002-03.

During that period, lawmakers agreed to boost the maximum allowable reserve to 10 percent of operating costs.

Some state officials boasted in 2007 of the then-Rainy Day Fund of $1.38 billion, a record-setting amount, but still equal to less than 8 percent of operating costs.

But during the past two fiscal years, legislators and former Gov. M. Jodi Rell approved nearly $2 billion in borrowing to cover operating costs — in addition to expending the entire Rainy Day Fund and nearly $1.6 billion in emergency federal stimulus grants.

Wyman’s successor as comptroller, Kevin Lembo, said this week he favors boosting the maximum reserve to 15 percent, a number Wyman proposed in the past and a limit several other states have adopted.

Lembo conceded that holding public funds unspent and in reserve always presents a political challenge, but recent history has shown Connecticut could have prepared better for the last recession.

The Finance, Revenue and Bonding Committee  voted 41-11 this week to adopt a measure that would raise the maximum to 15 percent.

But Democratic Reps. Jason Rojas of East Hartford and Mae Flexer of Killingly are pushing for a bill before the Appropriations Committee that would allow state government to amass a reserve equal to 30 percent of annual operating costs.

Rojas and Flexer wrote in joint testimony that achieving or nearing the maximum allowable reserve creates a false myth that government’s finances are adequately protected. “We as a state have the tendency to perceive the scoring of a sort of financial victory,” they wrote, adding that “this understanding may, at times, create the tendency for us to use our resources perhaps too enthusiastically.”

Rojas and Flexer added that while state government generated gross surpluses over the past decade totaling $5.87 billion, it deposited only $1.47 billion into the reserve.

But the state’s chief business lobby said that while a larger reserve has merit, allowing government to stockpile 30 percent of its annual operating budget simply is too much. Gov. Dannel P. Malloy’s administration estimates General Fund spending for this year at $17.945 billion. A 30 percent reserve limit based on that spending level would approach $5.4 billion.

“The priorities for us our to see state government reduce its bonded indebtedness and its pension liabilities,” said Bonnie Stewart, the Connecticut Business and Industry Association’s tax specialist.

With more than $19 billion owed, Connecticut has one of the highest bonded debts, per capita, of any state.

And the state employee pension account held less than 45 percent of the funds its needed to meet obligations to workers, plunging below the halfway mark for the first time in more than two decades, according to the last biennial actuarial valuation released last November.

Lembo said he believes a 15 percent limit is a good step to take next, adding there are other things the legislature can do to encourage responsible savings habits.

These include requiring monthly deposits into the reserve–rather than one at year’s end–whenever projected savings exceed a threshold level.

Lembo said he also favors reducing the debts tied to bonding and pension programs, and the legislature should ensure state Treasurer Denise L. Nappier remains empowered to dedicate surplus funds toward those purposes when necessary. “That’s why she is there,” he said. “She has the expertise on how to appropriately balance our debt and our investments.”