CT Builds Its Budget Reserve — As Post-Election Deficits Loom
Gowing reserve, but... back to top
Lembo also urged caution despite the growing reserve, noting that while Connecticut has recovered all of the private-sector jobs it lost during the last recession, job recovery stands at just 81 percent when public-sector jobs are considered.
The budget reserve is state government’s chief defense against a recession or other major economic downturn, which can cause tax receipts to drop by hundreds of millions of dollars in one fiscal year.
Connecticut’s income tax is particularly volatile because of the high concentration of wealth tied to Wall Street and the financial services sector.
About 35 percent of 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.
Lembo recommends a reserve of 15 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.
Malloy, who insisted throughout his successful 2014 re-election campaign that state deficit forecasts were wrong, closed the first three fiscal years after that win with budget shortfalls — albeit modest ones.
Connecticut had $519 million in its emergency reserves in July 2014.
That cushion was depleted to around $213 million after the state closed the 2015, 2016 and 2017 fiscal years with deficits of $113.2 million, $170.4 million and $22.7 million, respectively.
Technically, the just-completed fiscal year also ended in the red, with preliminary estimates showing a gap of $594.5 million.
But that deficit is a technicality. A new state law prohibits the comptroller from considering a percentage of income tax receipts tied to quarterly filings until after the fiscal year has closed. Once that revenue stream is considered, the state has sufficient funds to cover the shortfall and make the nearly $780 million deposit into its reserves.