Comptroller Kevin Lembo, citing increasing state revenue flow and a tax amnesty program, predicts a state government surplus of as much as $245.9 million by the end of the current fiscal year in June 2014.
In a letter to Gov. Dannel P. Malloy, Lembo said that his projection is $110 million above the Office of Policy and Management’s (OPM) earlier projection due to the inclusion of additional revenue from the state’s tax amnesty program that ended Nov. 15.
While the tax amnesty program partly contributed to the state’s improving outlook this year, various sources of tax revenue have also continued to improve, Lembo said. The sales and corporation taxes are each up by $30 million from initial budget targets, and the real estate conveyance tax is $15.6 million over initial estimates.
The Department of Revenue Services estimated that the tax amnesty program resulted in additional revenue in Fiscal Year 2014 in excess of $175 million – exceeding the budget target of $35 million.
“Month after month the state’s financial outlook for the current fiscal year is improving,” Lembo said. “This is a great sign for Connecticut’s economic recovery – but there are also uncertainties and future liabilities that we need to brace for. I strongly recommend that any General Fund surplus amount should be transferred to the state’s Budget Reserve Fund at the close of the current fiscal year.”
The Budget Reserve Fund balance – commonly referred to as the “Rainy Day Fund” – was $270.7 million at the end of Fiscal Year 2013, or 1.6 percent of planned spending.
“I have called for a reserve level of 15 percent of spending – beyond the 10 percent statutory requirement,” Lembo said. “It is essential to the state’s long-term fiscal stability that sufficient reserves be established as soon as possible. Too often in the past, opportunities to build reserves have been missed as other perceived budget priorities were pursued.”
In the chart below, Lembo juxtaposes state surpluses and deficits with Budget Reserve funding levels from Fiscal Years 1991 to recent years. The chart reveals that, since 1990, the General Fund has realized almost $5 billion in revenue windfalls – most of which did not go to build reserves.
“Connecticut would have weathered the 2009 recession far better had we prepared for it by fully funding our Budget Reserve Fund at 15 percent,” Lembo said.
Rebuilding the Budget Reserve Fund with this year’s surplus is imperative in light of mounting future liabilities expected to spike in Fiscal Year 2016, as projected by both the Office of Fiscal Analysis and OPM. Lembo said federal instability and uncertainties could also jeopardize the state’s outlook at any time – including any potential cuts to the defense industry and nonprofits, as well as impacts on Wall Street, and consequently tax receipts from capital gains.
“The bottom line is that Connecticut should use any opportunity now to protect taxpayers from future financial threats and uncertainties,” Lembo said.
As far as economic indicators, information from federal and state Departments of Labor and other sources show:
• According to Department of Labor data, the state lost 4,200 jobs through September and October (-4,100 in September, -100 in October). Despite the disappointing job numbers, the withholding portion of the income tax is up by over 3 percent through October. The state’s unemployment rate fell to 7.9 percent, the first time that it has dropped below 8 percent since April of 2009.
• Over the 12-month period ending in October, Connecticut employment has increased by 10,000 non-farm positions.
• According to the Connecticut Department of Labor, the state has recovered 48.6 percent or 58,900 of the 121,200 jobs lost during the recession. Nationally, about 80 percent of recessionary job losses have been recovered.
• The strongest job gains over the past twelve months have been in education and health services (+ 7,200), while the largest losses have occurred in manufacturing (-3,500) and financial activities (-3,400).
• Personal income in Connecticut grew at a rate of 0.9 percent between the first and second quarters of 2013. This ranked Connecticut 30th nationally in income growth. On an annualized basis growth was 3.6 percent, which is well above the 1.3 percent growth that was posted for 2012. Data for the third quarter will be released on Dec. 19.
• According to the Department of Labor, average hourly earnings declined 0.8 percent from last October and weekly pay was down 1.9 percent for the same period.
• The year-to-year change in the Consumer Price Index for All Urban Consumers (CPI-U, U.S. City Average) in August 2013 was 1.0 percent.
• The number of housing permits issued has shown solid gains over the past two years, but remain well below the peak of 2004-2005.