Forecasts say CT’s ‘fiscal cliff’ will be gone when pandemic aid expires
For more than a year, officials have feared “the fiscal cliff” — state programs would fall into a chasm once $3 billion in federal emergency pandemic relief expires.
But a new forecast, showing that state tax revenue will rise in coming years, has reduced that cliff to something less than a pothole.
With inflation topping 8%, a war in Ukraine and Connecticut that has further slashed 74,000 jobs from pre-COVID-19 levels, is the news too good to be true?
Lamont: “As ready as possible”
“When people say, ‘Oh my God, what’s going to happen when ARPA leaves? What’s going to happen if there’s a rainy day? What happens? if the world changes?” Governor Ned Lamont said Monday, referring to federal funds from the American Rescue Plan Act that will support state finances through 2025.
“We’re going to be as ready as you can be.”
There are numbers to back up the Democratic governor’s confidence.
The Legislature’s nonpartisan Office of Budget Analysis projected Monday that the General Budget Fund would have a built-in hole of about $800 million in fiscal year 2023-24, when Connecticut begins to reduce its use of pandemic relief, and $530 million in 2024-25, when the last of those funds would be spent.
This represents financing gaps of 3.5% and 2.4% respectively.
By comparison, they’re far below the 18% deficit in 2011 that produced one of the biggest tax hikes in Connecticut history, a hit of nearly $1.9 billion.
“We need to do some things to fix this, but it’s not waking me up at night,” House Speaker Matt Ritter, D-Hartford, said Tuesday, noting that the state’s rainy day fund , which is capped at $3.1 billion. , can easily close this gap.
Further increasing the likelihood of a smooth transition in coming years, Lamont and the Democratic-controlled legislature agreed to use $3.5 billion of this fiscal year’s $4.8 billion surplus to repay pension debt. This is expected to reduce required minimum annual pension payments by around millions of dollars per year – a savings that is not yet factored into “tax cliff” calculations.
“The Lamont administration has taken a cautious approach in using ARPA dollars over several years to ensure a sustainable and balanced budget in the years to come,” added Lamont’s budget director, the secretary of the Bureau. of politics and management, Jeffrey Beckham. “We are paying down the state’s long-term unfunded debt, addressing the needs of our most vulnerable residents, and creating an economic environment that attracts business.”
Analysts: CT tax revenue will continue to climb for years
But there’s an even bigger reason why — at least on paper — lawmakers won’t even need to dip into the fiscal reserve to fix these problems.
In a 2017 bipartisan agreement, lawmakers created a new fiscal safeguard, a program that requires the government to save a portion of volatile quarterly tax revenue tied to investment and business profits.
Since then, thanks in large part to a stock market, the so-called “volatility adjustment” has saved, on average, almost $1.1 billion a year. And that’s not counting the unprecedented $2.7 billion it is expected to save this fiscal year.
Buoyed by those rising numbers, Legislature and Lamont analysts now say the volatility adjustment will likely yield nearly $1.4 million a year between 2023 and 2026, nearly double the projections they have. published in January for this crucial period.
Once the volatility correction savings are applied, the projected deficits in 2024 and 2025 turn into estimated surpluses of $358 million and $675 million, respectively.
But some say it’s too good to be true.
Economic dangers still abound
The US Bureau of Labor Statistics reported an 8.5% increase in the consumer price index in March, the highest since 1982.
Oil prices continue to rise as the Russian invasion of Ukraine continues.
Deutsche Bank, which made headlines in early April as the first major bank to predict a mild recession in the United States, stepped up its warning last week by forecasting a major economic downturn by the end of 2023.
“This [all] has the strong potential to cause a huge downdraft,” DataCore Partners economist Donald Klepper-Smith said Tuesday.
Klepper-Smith, who was the state’s chief economic adviser in the late 2000s under Republican Gov. Mr. Jodi Rell, said the surge in the stock market between 2018 and 2021 — and the huge tax revenues tied to investments – gave lawmakers a false sense of security.
The state government coffers are “because of a rich uncle, not because we deserved it,” he added.
University of Connecticut economist Fred Carstensen is also skeptical of the state’s ability to continue raking in significant tax revenue.
“We’re in a very different world,” said Carstensen, who directs the Connecticut Center for Economic Analysis. “I think it’s completely unreasonable to incorporate this kind of [revenue] expectations.”
Connecticut, according to the state Department of Labor, still hasn’t recovered more than 55,000 of the jobs it lost during the worst of the coronavirus outbreak in 2020. The state has entered the pandemic shedding more than 25,000 jobs compared to the previous recession, which ran from late 2007 to mid-2009.
“Our basic economy is still very weak,” Carstensen added. “Our payroll hasn’t recovered, our employment hasn’t returned to… where we were in 2008.”
Minority Republicans in the House of Representatives issued similar warnings Monday night and Tuesday morning when majority Democrats passed a $24.2 billion budget for 2022-23 that increases General Fund spending by more than 6% in above current levels, but also offered more than $600 million in tax relief.
And while Democrats said the pandemic had created great needs in health care, social services and early childhood development that needed to be addressed, Republicans said there should have been less focus on programmatic spending and more on tax cuts, which could boost the state’s economy.
Democrats said it was one of the biggest — if not the biggest — tax cuts in state history. But the GOP countered that about half of the tax relief is one-time help and tried unsuccessfully to add one thing the Democratic package lacked: a reduction in state income tax rates for the middle class.
“There’s not much here for Connecticutans,” said House Minority Leader Vincent J. Candelora, R-North Branford. “It’s a budget that works for the government, not for the people.”