Comptroller Kevin P. Lembo. Keith M. Phaneuf /
Comptroller Kevin P. Lembo Keith M. Phaneuf /

State Comptroller Kevin P. Lembo agreed Monday with Gov. Dannel P. Malloy’s administration that Connecticut could be poised to bolster its budget reserves significantly for a second consecutive year.

But even should the state push its Rainy Day Fund in excess of $2 billion — a target early projections point to, both officials say — it still would represent less than half of the red ink Connecticut’s next governor and legislature must solve beginning in February.

Lembo, who was more conservative than Malloy one month ago when it came to surplus projections, largely backed the governor’s numbers this time, though he still tempered optimism with caution.

“It is still very early in the fiscal year and so the state should only rely cautiously on these positive early indicators, but there are a number of revenue categories performing above expectations,” Lembo, the state’s chief fiscal watchdog, wrote in his monthly budget assessment.

The General Fund, which covers the bulk of operating costs within the overall state budget, is on pace to finish $164.2 million in the black, the comptroller reported.

A modest surplus projection representing about 9/10ths of 1 percent of the General Fund, Lembo’s forecast nearly mirrors the $169.7 million surplus the governor’s budget office projected on Sept. 20.

The chief factor behind these projections are better-than-anticipated income tax receipts from paycheck withholdings, as well as extra sales and corporation tax payments.

More importantly, Lembo and Malloy also agree that a portion of the state’s income tax stream is coming in above one crucial threshold.

Connecticut also receives quarterly income tax payments from the self-employed and those that accrued significant earnings from capital gains, dividends and interest.

One of the most volatile portions of the entire General Fund tax system, this segment of the income tax has been subjected since last November to a new “volatility cap” that forces Connecticut to save all funds received above an inflation-adjusted-threshold that this fiscal year stands at $3.2 billion. Over the last 21 months this revenue source has been at its most robust since before the last recession.

Both the comptroller and the governor estimate the state could clear that threshold by as much as $648 million and deposit that money in its reserves.

If both the $164.2 million General Fund surplus and the $648 million in volatility cap funds are added to the Rainy Day Fund, which already holds $1.2 billion, Connecticut’s reserves would top $2 billion.

Moody’s Investors Service, a major Wall Street credit rating agency, issued a report last week calling Connecticut’s growing budget reserves a “credit positive.”

This is not a specific upgrade of the state’s bond rating — which could, in turn, lead to lower interest costs.

Rather it is a distinct event recognized by Moody’s as having the potential to affect future ratings.

Gov. Dannel P. Malloy (file photo)

“This is a great, objective piece of news that affirms the positive economic and budget information we have received over the past several months,” Malloy said. “ … Now, we should all be proud to see the budget reserve fund grow to $2 billion — a record amount. Connecticut has many challenges ahead and this statement from Moody’s makes it clear that the work we have done is putting us on the right track.”

The volatility cap funds normally wouldn’t be available until Sept. 30 next year. The state’s fiscal year runs from July 1 through June 30, but the comptroller’s office doesn’t close the books on the expired fiscal year until Sept 30.

Long before that point, the next governor and legislature must begin working on a new, biennial state budget for the fiscal years beginning July 1, 2019 and July 1, 2020. The incoming governor must propose a budget in early February, and that plan must solve a big problem.

State finances, unless adjusted, would run $2 billion in deficit in the first year and $2.6 billion in the second, according to the legislature’s nonpartisan Office of Fiscal Analysis.

If the next governor and legislature follow the example of their predecessors, they will tap the $1.2 billion Rainy Day Fund — and assign the $164.2 million surplus projected by Lembo — as one-time revenues to whittle down those multi-billion-dollar deficits.

If they want to dedicate the $648 million held in the volatility cap before next September to the budget crisis, incoming legislators and the next governor have only one option.

They cannot repeal this provision because the outgoing legislature found a way to contractually protect it. Specifically, lawmakers wrote a pledge into bond covenants not to tamper with the volatility cap for 10 years. Bond covenants are contracts between the state and its investors.

But the law does allow one loophole. The funds can be tapped early if the governor signs a declaration of fiscal exigency, essentially declaring a budget emergency, and if 60 percent of both the House and Senate agree.

Keith has spent most of his 31 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut’s transportation and social services networks. He has been the state finances reporter at CT Mirror since it launched in 2010. Prior to joining CT Mirror Keith was State Capitol bureau chief for The Journal Inquirer of Manchester, a reporter for the Day of New London, and a former contributing writer to The New York Times. Keith is a graduate of and a former journalism instructor at the University of Connecticut.

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