Comptroller Kevin P. Lembo intends to change state government’s saving habits with a new reserve system that takes into account Connecticut’s lucrative-yet-volatile relationship with Wall Street.
Lembo, a Democrat who begins his second term Wednesday, said the proposal he would unveil next week would serve as a “recessionary seawall” that would include automatic savings deposits into a reserve fund whenever tax receipts swell.
“Connecticut has an opportunity to carve out a new era of fiscal stability,” said Lembo, who will forward his proposal to lawmakers during the 2015 General Assembly session, which convenes Wednesday.
The budget reserve, commonly known as the Rainy Day Fund, “should be more than a simple savings account,” Lembo said. It also should be one of the chief safeguard’s protecting vital services during economic downturns.
The state currently holds $519.2 million in its reserve – an amount equal to just under 3 percent of the general fund, which covers the bulk of annual operating expenses.
But state tax receipts fluctuate by far greater amounts during both good times and bad. In 2009, during the depths of the Great Recession, the state’s general fund tax receipts fell almost $2.3 billion below the level anticipated in the budget.
Connecticut has a history of not saving extensively for economic crises. Until the early 2000s, the legislature never permitted the reserve to top 5 percent of annual operating costs.
And though the limit now stands at 10 percent, Connecticut legislatures and governors have never saved that much at one time. The largest Rainy Day Fund ever stood at just under $1.4 billion in 2008, an amount equal to 8 percent of operating costs at that time.
Officials have relied instead upon the state’s great household wealth, which ranks – per capita – higher than any other state’s the nation. That wealth, coupled with the state income tax, theoretically could handle any fiscal crisis.
Yet the financial services sector of Connecticut’s economy, though healthy, has not rebounded to the heights it enjoyed prior to the last recession, because of a combination of industry downsizing and federal investment reform.
Still, Connecticut is not alone in its questionable savings habits.
According to research by the Pew Charitable Trusts, Connecticut is one of 37 states that set limits on how much government can save for a budgetary “rainy day.”
Only 12 states – Connecticut is not one of them – have designed budget reserves to compensate for particularly volatile sources of revenue.
“Connecticut currently has no established policy for maintaining its budget reserve fund, relying mostly on good fortune over decades to set aside – or not set aside – unanticipated windfalls,” Lembo said.
Though full details won’t be released until next week, the comptroller said his new proposal would trigger automatic deposits into the reserve when tax receipts top certain levels and target those revenue sources that are particularly volatile.
For example, about 40 percent of Connecticut’s income tax receipts come from quarterly payments, not payroll withholding. And most of the quarterly payments involve earnings from capital gains, dividends and other investment income, which traditionally grows – or shrinks –by double-digit percentages from year to year.
“Connecticut’s high concentration of individual wealth and corporate headquarters – and the related impact of ups and downs on Wall Street – contribute to large fluctuations in revenue as economic conditions change,” Lembo said.