Can Lawmakers Resist Urge to Spend $1.3 Billion Tax Windfall?

Connecticut’s revenue picture for this year looks brighter than in years past.
A consistently underperforming economy has typically delivered unexpectedly weak results each April 15, leaving the state scrambling to fill massive budget holes.
But this year, Connecticut saw a surprise surge in revenues—about $1.3 billion more than expected as residents took advantage of expiring federal tax provisions and the stock market correction sparked an increase in capital gains.
The revenue windfall comes as legislators face a $387 million projected deficit for the current fiscal year, which ends June 30.
The 2019 fiscal year budget is currently showing a $165 million projected deficit.
The question now at the state Capitol: What to do with the newfound cash?

One-Time Gains

Governor Dannel Malloy has warned that much of the windfall is a one-time occurrence and advised lawmakers against spending money he said should remain in the state’s reserves.
And the volatility cap lawmakers enacted last fall requires the state to save these funds.
Consequently, if the money is banked in the state’s rainy day fund, with its current balance of $212 million, the budgetary savings account will be flush with around $1.5 billion.
If lawmakers choose not to solve the current deficit before the session ends next week, that hole could be filled from the rainy day fund, still leaving about a $1.1 billion balance.
Lawmakers adopted the current two-year budget last fall but, due to the projected deficit, each party submitted proposals this year to close the deficit and cover other shortfalls with the unanticipated revenue.

GOP, Democratic Plans

In separate budget proposals, Democratic and Republican lawmakers are both showing a willingness to bypass the volatility cap and spend some of the windfall money to close the deficit—and spend more on various programs.
Some Democrats discussed using the extra funds for programs they deemed essential, including the Medicare Savings Plan, restoring $90 million in municipal grants that Malloy cut, and beefing up the state’s dwindling transportation fund.
An updated plan Republicans released May 2 spends about $300 million of the windfall on social services—including the Medicare Savings Plan—higher education, transportation, and municipal funding.
The GOP plan also uses $209 million to pay down the state employee pension fund and another $193 million for the state teacher retirement fund, but does not close out the deficit.

The current two-year budget was written by legislative Democrats and Republicans, shutting Malloy out of their deliberations.
A different dynamic emerged this year, and the two sides don't appear as close as they were.
Democratic leaders met May 2 with Malloy to discuss the budget while Republicans, shut out of that discussion, released their revised budget proposal.

Respect Volatility Cap

Legislators don't have to balance the budget. They have the option of leaving it as is, tapping the rainy day fund for the current year, and leaving next year's for the newly elected legislature to handle in 2019.
CBIA economist Pete Gioia says legislators should abide by the volatility cap and not be tempted to rely on the rainy day fund for future spending.
"This largely one-time revenue should go into the rainy day fund to cover current and future deficits," Gioia said.
"The idea to tap into it, going against the volatility cap, is foolish."
Gioia pointed out that beyond the 2018 and 2019 deficits, larger problems are projected, with possible gaps of $2.2 billion in 2020, and $2.9 billion in 2021.
Still, analysts have also said that roughly one-third of this year's unanticipated revenue—around $400 million—was not a one-shot influx and will happen again next year.
Gioia said that confirms what CBIA has preached for decades: If you let the private-sector economy grow, it will ultimately provide the necessary revenue to support reasonable state services.

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For more information, contact CBIA's Pete Gioia (860.244.1945) | @CTEconomist