State government’s coffers have swelled by hundreds of millions of dollars since the coronavirus struck in mid-March, despite warnings of a nearly $1 billion deficit just three months ago.
Connecticut’s rainy day fund, which stood at $2.5 billion when the pandemic struck, now approaches $2.8 billion, according to an ongoing review of thousands of state tax returns filed after July 15.
And while the legislature’s Office of Fiscal Analysis still expects Connecticut to exhaust most reserves over the next 11 months, they now project the state will maintain a modest, $250 million cushion one year from now.
That’s a far cry from two months ago, when Gov. Ned Lamont warned Connecticut might be broke by mid-2021 and potentially saddled with $500 million in operating debt. The governor hoped to avoid this debt by seeking concessions from labor unions, who declined, noting they provided givebacks in 2009, 2011 and 2017.
How has state government gotten richer since the pandemic began?
“That’s a fair question,” said Rep. Jason Rojas, D-East Hartford, co-chairman of the Finance, Revenue and Bonding Committee. “I think it’s a matter of us having a conversation” with Lamont’s budget office.
Administration officials and the legislature’s nonpartisan analysts both warned during a joint forecast three months ago that fiscal projections were little more than a shot in the dark.
Normally they project revenues each spring immediately following the April 15 income tax filing deadline. But there was almost no data available to budget agencies when they prepared their April 30 estimates.
That’s because Lamont deferred that deadline to July 15 to ease financial burdens during the height of the pandemic.
Hundreds of thousands of Connecticut residents were receiving unemployment benefits, many temporarily enhanced with emergency federal funds. Those benefits are subject to income taxation, but analysts also warned it’s impossible to predict how those numbers would trend.
How long would the federal government prop up these enhanced benefits? How many of these people would return to work as the pandemic eased? And what if the coronavirus worsens, taking unemployment with it, this fall or winter?
The update provided Tuesday to the finance committee, only the second since the post-July 15 analysis began, upgraded revenues for the just-completed fiscal year by nearly $640 million compared with an April 30 projection.
In fairness, roughly two-thirds of that is a phantom gain. Federal Medicaid payments expected in July simply arrived before the last fiscal year ended on June 30, wiping away a big chunk of the nearly $1 billion deficit projection from three months ago.
But other revenue growth isn’t tied to an accounting switch.
Tax receipts accruing back to the just-completed fiscal year are running $200 million higher than expected. And based on that data, analysts also bumped expectations for 2020-21 tax receipts by $50 million.
Economists have said many investors sold their stocks in late 2020 amidst growing fears of a recession. And even more did so as the markets plunged in March, reaping big, one-time capital gains.
Still, OFA staff warned nothing is certain at this point. “Our FY 21 projections are preliminary and subject to significant change pending further analysis,” staff wrote in a memo to the finance committee.
Kosta Diamantis, the governor’s deputy budget director, also cautioned against the temptation to spend reserves quickly.
“While it may certainly appear as good news for our state, and testament to strong financial management, that we are able to … improve our estimates for the deposit into the Budget Reserve Fund, we cannot lose sight of the challenges that are ahead in FY21,” Diamantis said. “Uncertain times require we stay the course of fiscal stability.”
Connecticut’s coffers also are swelling, however, because the Lamont administration spent hundreds of millions of dollars less than originally planned this fiscal year, and legislators have been pressing all summer for more details.
The budget routinely tasks the Executive Branch annually with achieving savings targets through attrition or other efficiencies. The savings goal for the just-completed fiscal year was $209.2 million in the General Fund, which covers about 90% of all operating costs in the overall budget.
The Lamont administration estimates it saved $544.1 million.
The Appropriations Committee has been meeting since June with agency heads, particularly those whose departments returned large sums of money.
Sen. Cathy Osten, D-Sprague, who co-chairs the panel, said lawmakers are concerned, but aren’t drawing conclusions yet.
“I don’t know that that’s fair yet,” she said, adding that a key meeting still must be held in August with Lamont’s budget director, Office of Policy and Management Secretary Melissa McCaw. “That’s why we have to finish our meetings with all of the state agencies.”
Osten added that some legislators are worried that more money should have been sent to social service agencies, other care providers, and to public colleges and universities to cope with the pandemic.
“I don’t think we can wait too long,” she said. “Clearly we have some concerns we have to address.”