The global economy may be slipping and Wall Street, despite a robust six weeks, remains down for the year — but you wouldn’t know it by looking at state government’s coffers.
New projections Thursday from state analysts have revenues running $571 million higher than budgeted levels, up $425 million from last month alone. That would push this year’s potential state surplus from nearly $2.35 billion up to almost $2.8 billion.
And equally important, the consensus report from Gov. Ned Lamont’s budget agency and the Legislature’s Office of Fiscal Analysis also sees a rosier path for the next two years.
Having achieved a record-setting $4.3 billion surplus last fiscal year, Lamont and lawmakers embraced very conservative revenue expectations for the new budget. And Thursday’s report suggests that correction may be sufficient to keep state finances stable through 2025.
“While this news is certainly encouraging, we must remain vigilant against future economic turmoil,” said Lamont, who was re-elected to a second term on Tuesday after prevailing over Republican Bob Stefanowski, a Madison businessman. “I remain concerned that the global economic situation, impacted by geopolitical forces outside the control of Connecticut’s leaders, may affect our future financial position.”
Despite a fall rally, the Dow Jones Industrial Average closed Thursday down 7.8% for the calendar year. The S&P 500, another key index of market health, is down 17.5% since Jan. 1.
Connecticut, with its large financial services sector and huge pockets of wealth in Fairfield County, relies heavily on state income tax receipts connected to capital gains and other investment earnings.
Lamont and lawmakers assumed this revenue stream — which produced almost $4 billion in last fiscal year — would cool off by 17%, dropping to about $3.5 billion in 2022-23. And the latest report not only has it holding at that number, shrinking by another 10% in the next budget, and then starting to climb by 2024-25.
But even as the income tax has slowed, the state sales tax has taken off. Revenue projections now top $5 billion for this fiscal year, up $300 million from the level originally built into the budget. And analysts expect receipts to approach $5.2 billion next year and top $5.3 billion by 2024-25.
The legislature’s nonpartisan analysts warned last spring that the days of multi-billion-dollar budget surpluses might be over after 2023. They projected a very modest fiscal cushion closer to $300 million — less than 1.5% of the General Fund — by 2024, and about $675 million, or 3%, in 2025.
But if sales tax receipts and other revenues keep growing as projected in Thursday’s report, each of those projected surpluses would grow by another $300 million — pushing the 2025 forecast close to $1 billion.
Connecticut already has $3.3 billion in its rainy day fund, equal to 15% of this year’s operating expenses, the maximum allowed by law. It also has roughly $1.4 billion in emergency federal pandemic relief reserves to help support state finances through 2025.
Rep. Sean Scanlon, D-Guilford, who co-chairs the legislature’s tax-writing Finance Committee and who was elected Tuesday to his first term as state comptroller, treated Thursday’s report as good news — to be taken cautiously.
Scanlon said these surpluses stem largely from a new savings program the legislature approved in bipartisan fashion in 2017, one that specifically limits government’s ability to spend income tax receipts tied to investment earnings.
“Two days ago the people of Connecticut gave a thumbs up to the fiscal policies that we have been undertaking in the last two years and we will continue those now even with that good news, knowing there are uncertain waters ahead,” Scanlon said.
Lamont went one step further Thursday, announcing as the new forecast came out that he wants to renew complex legal safeguards that would make it difficult for legislators to modify this savings program, as well as spending and borrowing caps also adopted as part of the bipartisan budget of 2017.
To legally block future lawmakers from easily repealing or otherwise tampering with these budget controls, the 2017-18 General Assembly ordered the treasurer to write the state’s pledge not to do so in covenant language offered to investors who buy state bonds. Such covenant language carries the legal force of a contract, and the state agreed to “bond-lock” these provisions in place for five years.
But this bond pledge expires in June 2023.
“Extending these protections will send a strong signal to the businesses, investors, credit rating agencies, and the public at large that Connecticut is serious about living within our means and saving for the future,” Lamont said.
The Democratic governor did not say specifically what terms he would propose to extend this system, but said he would offer more details by early February, when his next biennial budget proposal is due to the legislature.