The last time state government filled its piggy bank to the limit wasn’t exactly a shining moment in Connecticut budget history.
The savings limit was relatively easy to hit and offered only a meager buffer against even a modest recession.
And once the rainy day fund was full, officials ignored cash-starved pension programs — at great cost to future taxpayers — and instead doled out hundreds of millions of dollars in rebates to voters.
That was nearly 20 years ago. Now Connecticut is again nearing a limit on its reserves. But things are very different in 2019.
By the end of the new budget cycle, the state could have a reserve three times the size of the cushion it built in the early 2000s.
And if projections hold over this fiscal year and next, Gov. Ned Lamont and the General Assembly could begin accelerating payments on Connecticut’s massive pension debt.
“Re-election is important to people, being able to go back home and say ‘See what I did?’” said Sen. John Fonfara, D-Hartford, co-chairman of the Finance Committee and one of the chief architects of the enhanced savings program developed in recent years. But for too many years, what governors and legislator “did” often involved expanding or creating new programs — even if the revenue growth paying for them might not last that long.
Fiscal stability was sacrificed to the next state election cycle, which comes every two years.
“I’m grateful to my colleagues in this session for remaining disciplined, because it has paid dividends and will continue paying dividends,” Fonfara said.
“If our state can keep to this promise, and maintain financial discipline, then Connecticut could be on the verge of a new day of fiscal stability and public trust,” said Comptroller Kevin P. Lembo, who also helped develop new savings initiatives.
Both Lembo, whose next monthly budget forecast is due today, and Lamont’s administration, project Connecticut will have a more than $2.3 billion in reserve when the audit of the just-completed 2018-19 fiscal year is done in late September.
This easily shatters the previous records of the $1.37 billion the state held as late as June 2009.
More importantly, the $2.3 billion represents 12 percent of annual operating expenses, topping the 8 percent mark also set in 2009.
But it could get even better.
Projections from the legislature’s nonpartisan Office of Fiscal Analysis show Connecticut could add $930 million more to the reserve over this fiscal year and next combined.
And by the end of summer 2021, the state could have $3.26 billion in the bank.
If that happens, Connecticut would have to spend some of it. The most the reserve can hold is 15 percent of operating costs, which would be about $3 billion.
But don’t look for the other $260 million to come back as $50-per-person tax rebates. Connecticut would be required by pour the rest into its pension funds, which have tens of billions of dollars in unfunded liabilities.
Lembo has argued since he took office in 2011 that Connecticut needs a reserve of at least 15 percent due to the unusual nature of the state income tax — which pays for slightly more than half of all General Fund expenses.
In May 2002, when Connecticut last filled its rainy day fund to the max, the savings limit was just 5 percent of annual operating expenses. (Note: The $595 million socked away by Gov. John G. Rowland and the legislature was wiped out entirely that same month to help close an $815 million budget deficit.)
Unlike many other states, nearly one-third of Connecticut’s income tax receipts come not from paycheck withholdings but from quarterly tax filings. And those quarterly returns are dominated by capital gains, dividends and other investment-related earnings.
Those receipts often grow by double-digit percentages during good economic times — and plunge in the same fashion during a recession.
Legislators from both parties agreed two years ago to make three huge changes. First, they instituted a “volatility cap,” which requires the state to save income tax receipts from quarterly filings after they exceed a threshold level.
Second, legislators and governors no longer can adopt a budget with nearly equal spending and revenues. Now they must design the budget to run — at least on paper — in surplus of just under 1 percent.
These first two initiatives are designed to force the state to save for the next recession, when income tax receipts may plummet. The final initiative says the rainy day fund can hold an amount equal to 15 percent of operating expenses, but anything beyond that the must be spent paying down debt.
Lamont, who inherited this system when he took office in January, insisted that legislators maintain it and look to grow reserves further.
“This will allow us to best position the state for the next generation of economic growth as we demonstrate the fiscal prudence and willingness to tackle the long term obligations that have impeded us for decades,” Chris McClure, spokesman for the governor’s budget office, said of the swelling reserves. “It is truly a credit to the proponents of the [volatility] cap and the state’s adherence to it during this period of strong economic performance that we are able to move forward so quickly.”
And while paying down pension debt is important, Fonfara said households and businesses might most appreciate the stability the reserve provides — especially when the next recession arrives.
“In the past we would get trapped in a spiral: Little or no reserve means raising taxes and cutting services. Both of those have an impact on the long-term of the fiscal health of our state and the quality of life,” Fonfara said, adding that a larger reserve means less budgetary pain during the worst economic times. “This way we can still make investments in our state.”
“Legislators from both parties agreed two years ago to make three huge changes”.
This statement is misleading. The reason we have the new caps is Republicans in the Senate refused to back the Democrat budget and they were joined by three Democratic senators, Hartley, Slossberg and Doyle. They all agreed that the legislature could not be trusted to show fiscal discipline and restraint and forcing caps (that should have been in place since 1992) was the only way to restore fiscal discipline. They were joined by leaders on finance and bonding that suggested even stronger measures. To be clear the vast majority of Democrats did not want spending caps of any kind and most still do not.
Now that we are back in the good times, we should rebalance our state-local revenue structure to be less reliant on the local property tax.
So what you are saying is that you over-taxed CT residents and have this huge kitty to waste on stupid things instead of paying down non-operational costs that make up 30% of annual spending. Why not transfer some to the STF and fix the roads/bridges.
We’ve heard the extremes with this fund in the past few years, zero to overflowing. Now flush with cash, every reasonable person I know would look at the assets and liabilities and try as hard as they could to make sure they’re in the black and not in the red.
If there is such a bloated fund that is not earmarked, why not pay down some long term debt and reduce the unfunded liabilities in the pensions? Would seem to me that 300-400 million to these would both be prudent and go a long way to shore up our finances. Invest the rest and use the proceeds to continue paring down the liabilities we have. Pay it off!!!
We know that this is dependent on the case that money isn’t used to buy votes, satisfy political favors, or give more free things away. Some may read this article and think it’s shopping day. Is our Legislature the reasonable person we know or not?
Nice. But where is the Governors plan to revive CT’s decade long stagnant economy ? Any plans to lower taxes ?
The state’s economy is stagnant, with not enough new jobs to replace those lost in 2008 and subsequently. The people leaving the state have higher incomes than those replacing them, and the population total has been stable and aging.
So where have these surpluses been coming from? Even payroll tax receipts have somehow been up.
Yes, federal tax reform brought a lot of money into the state. And yes, federal defense policies have helped a number of industries in CT. But are those the only reasons?
The policies which have benefited CT could be changed by national Democrats, which would be damaging. That’s true without a recession.
Without a good understanding of where the money is coming from, it’s impossible to know how vulnerable the state is. Such an analysis seems essential to any policy discussion about how much the state should be spending each year. Even a large rainy day fund can be used up quickly, so praising the current situation is excessive.
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