Lamont Releases Plan to Tap Rainy Day Fund, Trim Spending and Extend Tax Surcharge

Gov. Ned Lamont proposed using $1.82 billion from the state’s “Rainy Day” reserve fund to offset a project $2 Billion budget deficit in 2021.

Lamont’s proposal, released on Thursday, included $200 million in “mitigations,” including projections that the state could save $30 million through a hiring restriction for state jobs, $25.3 million rescinded from the current budget, and using $100 million in federal COVID relief funds to pay for state public health and safety costs.

Another $44.8 million in mitigations proposed by Lamont, most significantly maintaining the existing 10 percent corporate tax surcharge for 2021, would require legislative approval.

Melissa McCaw, the governor’s budget secretary, said in a press call Thursday afternoon that the legislature does not need to approve the provisions before the regular session. The Office of Policy and Management will release two more budget projections before the legislature convenes its regular session in January, which will give legislators a clearer picture of what the deficit will be before they make any decisions, McCaw said.

Comptroller Kevin Lembo released a budget projection on Thursday that forecasts a $1.87 billion deficit for 2021 – lower than the most recent OPM projection of a $2.02 billion deficit which is the basis of Lamont’s proposal.

Lamont’s plan to draw down $1.82 billion from the rainy day fund would make use of much of state reserves which have grown steadily since lawmakers voted in 2017 to require that all revenues above an agreed threshold would be deposited into the fund each year. 

The reserves surpassed $3 billion in August.

McCaw said that proposed hiring restrictions would take effect after Oct. 2, and would not require a “full freeze,” given the needs of critical services like public safety and health.

“Bonafide offers of employment as of October 2 will be honored, and any other vacancies that have been approved will be reevaluated, and state agency heads will be required to prioritize their hiring,” McCaw announced.

According to McCaw, federal Coronavirus Response Funds will cover salaries and fringe costs in several agencies of the Department of Public Health that have been closely involved in the COVID response.

The $25.3 million in rescissions would be spread across government departments, with the judicial branch at $5.5 million, legislative branch at $2.2 million, Department of Developmental Services at $3.6 million, Department of Social Services at $2.4 million, and Department of Mental Health and Addiction Services at $2.1 million, facing the largest cuts by dollar amount.

McCaw said that the budget picture has improved since April forecasts predicted that Connecticut would end the 2020 fiscal year $934 million in deficit. Instead, the state received $500 million in federal funds earlier than anticipated, saw fewer refunds in 2020 because the filing deadline was extended, and received more income and sales tax revenue than expected.

McCaw said that it remains an open question whether that positive trend would continue or if the state will be forced to shut down again, or if businesses like restaurants that relied on outdoor dining see a decline in the colder months. That’s why consensus revenue estimates in November and January will be key to assessing the state’s budget picture, said McCaw.

“We’re not going to look at one month of positive news and say, ‘Let’s just assume that happens for the rest of the fiscal year, and there the problem is behind us,’” McCaw said. “I think we need to be a little bit more measured and prudent in our approach, but we should acknowledge positive news when we continue to see that being maintained.”

Consensus revenue estimates will also be crucial in determining if the state has reached a borrowing cap that would require the governor and lawmakers to look at rolling back authorized, but unissued bonds. The state would have exceeded that cap if the legislature had adopted the April consensus revenue estimates before it adjourned over COVID concerns.

McCaw said she expected that budget tightening will likely extend past 2020, given estimates by OPM of shortfalls exceeding $3 Billion in 2021.

“When you look at $6 billion against a $3 billion rainy day fund, you can see that could go rather quickly, and there’s still work for us to do,” McCaw said.

Latest from Brendan Crowley