Questions about the last recession complicate CT’s budget woes

Gov. Dannel P. Malloy’s budget office and nonpartisan legislative analysts agree that state income tax receipts are coming in more slowly than anticipated.

But the reasons why a shortfall of between $90 million and $100 million is anticipated differ.

The problem Connecticut faces has some similarities to a larger struggle states and the nation as a whole grapple with: How much damage was done to the economy during the last recession and the initial years of recovery?

“This time it is different because we had a recession combined with a financial collapse,” said Fairfield economist Edward Deak, who oversees the Connecticut economic forecast for the New England Economic Project. “We came close to an economic calamity of the magnitude of The Great Depression.”

According to University of Connecticut economist Fred V. Carstensen, who heads the Connecticut Center for Economic Analysis, states are facing an unprecedented period of uncertainty when it comes to the federal government’s efforts to measure the impact of what has been called “The Great Recession.”

The recession was marked by drops in productivity and employment while the financial collapse was more of a banking problem.

Couple that, Carstensen said, with the federal government’s reluctance in recent years – in sharp contrast to past recoveries – to borrow and invest in research and development, transportation and other economic drivers, and fiscal forecasters find themselves in very new territory.

UConn economists learned about this challenge during the first half of 2015.

The center estimated in February that the state could add a whopping 44,000 jobs in 2015 and 2016 combined. That report relied heavily on federal Bureau of Economic Analysis data that had tracked Connecticut’s economic growth in 2012 and 2013 as second only to Massachusetts’ among northeastern states.

Just four months later, though the federal bureau revised its data, deciding Connecticut’s economy between 2012 and 2014 had grown a whopping $4 billion less than originally anticipated, lagging nearly all states in the Northeast.

Faced with that dramatic reversal, the UConn think-tank revised its own projections, estimating that modest job growth in 2015 would stall by year’s end.

But what about the new state budget the legislature and Gov. Dannel P. Malloy approved in late June. That two-year plan, which includes $19.8 billion this fiscal year and $20.4 billion in 2016-17, relied in part on those rosy federal numbers that have since been recanted.

If that’s not confusing enough, the situation recently got murkier.

The federal bureau issued new numbers in September, going positive one more time. The BEA specifically used a new methodology to assess how states’ personal income growth is affected by residents who live in one state and work in the other. After concluding Connecticut had more “earnings inflows” than originally anticipated, the Nutmeg State got one of the larger positive adjustments in the Northeast.

So where do we stand.

Malloy’s budget office said income tax receipts are down about $100 million this fiscal year, but that’s due largely to volatility and weaker investor earnings from the stock market. It doesn’t stem from a drop in income tax receipts tied to paycheck withholding.

The legislature’s nonpartisan Office of Fiscal Analysis recently projected a similar reduction in receipts, almost $93 million. But according to OFA, it is reflective largely of paycheck withholding being lower than anticipated – a sign of a broader weakness in Connecticut’s economic recovery.

Carstensen said he remains skeptical of overall personal income growth in Connecticut because he believes that many residents are finding work across the borders. “The east and west ends are feeding off of Boston and New York, but the rest of Connecticut is a basket case,” he said. “We are still creating very low-quality jobs.”

Deak said he does believe the latest federal numbers do offer some reason for cautious optimism about the economy, but not enough for Connecticut and other states to relax their fiscal vigilance. “For states, I would think they would want to be as cautious as possible and err on the side of conservative budgeting.”

“It’s not just the BEA,” Deak added. “The federal government is at loggerheads with itself, about how bad the problem is and what to do to keep the economy moving forward.