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Connecticut’s government remains on pace to rack up the second-largest budget surplus in state history this summer. 

But a new revenue forecast released Monday shows that $2.9 billion windfall will be $400 million less than expected as investment-related income tax receipts have begun to pull back after a four-year surge.

The consensus report from Gov. Ned Lamont’s administration and the legislature’s nonpartisan Office of Fiscal Analysis also projects revenues will continue shrinking by more than $530 million during the next two-year budget cycle but remain high enough to keep state finances well in the black. In fact, analysts say, one key savings program still will capture $1.4 billion by July 2025.

Lamont, who’s expected to use this report to press his legislators to adhere closely to the spending cap in the next budget, was restrained in his assessment.

While Lamont, a fiscal moderate, called the overall report “good news,” he added that it “shows the importance of adhering to the fiscal guardrails that are protecting our state budget from wild swings of the stock market, and is yet another reminder that Connecticut cannot responsibly commit one-time revenues to ongoing expenses.”

The governor’s fellow Democrats in the House and Senate majorities want to carry hundreds of millions of dollars from the current fiscal year’s surplus into the next biennial cycle to boost funding for higher education, health care and social services. They’ve also proposed using an accounting maneuver to shift hundreds of millions of dollars in tax receipts outside of the cap to bolster aid for cities and towns.

Lamont reminded lawmakers Monday that since caps on spending and borrowing were enacted in 2017 — along with aggressive savings programs — the state has amassed a record-setting $3.3 billion in its rainy day fund while also paying an extra $5.8 billion against its massive pension debt.

“Connecticut’s fiscal health has improved dramatically since the bipartisan fiscal guardrails were first passed in 2017,” the governor said. “To continue that momentum, we need to pass a budget that avoids the gimmicks and mistakes of the past by adhering to our spending and revenue caps.”

Senate Minority Leader Kevin Kelly, R-Stratford, echoed Lamont’s support for the caps and savings programs enacted by both parties six years ago and called for officials to prioritize adopting the first state income tax rate cut since the mid-1990s.

“Those smart fiscal guardrails have led us to the cusp of the first state income tax cut in three decades: They ain’t broke, and they don’t need fixing,” Kelly said. “Taxpayers deserve a state budget with the maximum amount of tax relief, which respects the fiscal pledges we have all made as state lawmakers.” 

Leaders of the legislature’s other caucuses didn’t comment immediately after the consensus report was released late Monday afternoon.

But critics counter that’s not the only thing that’s changed since 2017.

Connecticut went through a coronavirus pandemic that severely stressed its social service safety net, its child care industry, nursing homes and other health care providers, and local school districts.

The worst of the pandemic, in 2020 and 2021, was followed by a 2022 that saw the national inflation rate strike a 40-year high of 9% last June.

More importantly, they say, the state’s huge long-term debt — almost $90 billion involving unfunded pension and retiree health care obligations and bonded debt — was amassed over seven decades. And even were the state to dedicate all of the growth from a six-year revenue boom toward paying down its debt — at the cost of many core services — debt would nonetheless remain a major challenge to state finances well into the 2030s or 2040s.

According to the new report, corporation and other business tax receipts have grown by about $160 million from mid-March estimates but not enough to counter a $560 million drop in income tax revenues — most tied to investment earnings.

This drops the projected surplus for the fiscal year ending June 30 from $3.3 billion to $2.9 billion. To offer some context, though, that’s still the second-largest potential surplus in state history, topped only by last year’s $4.3 billion cushion.

And $2.9 billion represents 13.2% of the entire General Fund. Connecticut never had closed a fiscal year even $1 billion in the black until 2019, when it finished with $1.3 billion left over, according to the Office of Policy and Management. It also had a $1.7 billion surplus in 2021.

And while the post-2017 revenue boom is slowing, analysts say it’s not vanishing entirely.

Analysts had projected the savings program that restricts lawmakers from spending a portion of quarterly income and business tax receipts would capture $1.1 billion next fiscal year and $1.2 billion in 2024-25.

But the new report says the tightening of investment-related tax receipts will continue in the next biennial cycle, and officials reduced those projected savings estimates to $700 million in each of the next two fiscal years.

“Today’s consensus revenue figures confirms Connecticut’s economy remains strong and consumer confidence continues to be in great shape,” said Senate President Pro Tem Martin M. Looney, D-New Haven. “This additional revenue, along with other funding sources, should be used to support a number of critical areas of the state budget. The time to invest is now.”

Leaders of the legislature’s House caucuses didn’t comment immediately after the consensus report was released late Monday afternoon.

That potential loss of $900 million to the savings program over the next two years would be offset in part by another $370 million — most from continued growth in sales and business tax receipts, two revenue sources that continue to rack up big numbers as inflation rates remain challenging.

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.