State Budget Forecast Improves From September Estimates

Connecticut’s budget forecast has continued to improve as revenues from sales, income and real estate taxes exceed earlier projections.

The Office of Policy and Management, Gov. Ned Lamont’s budget agency, projected a $1.26 billion deficit for fiscal year 2021 in its monthly forecast released Tuesday. It’s much worse than the $166.2 million surplus the state budgeted back in December, but it’s 76 percent less than the $2.02 billion deficit the office was projecting as recently as Sept. 20.

The improved budget picture is a combination of better than projected revenues —  $18.5 billion compared to $18.05 billion last month – and of a reduction in projected spending – $19.77 billion compared to $20.08 billion last month, according to the forecast.

State Sen. Cathy Osten, D-Sprague, co-chair of the Appropriations Committee, noted that the revenue projections have continued to improve since budget officials projected in April that Connecticut would end the 2020 fiscal year $934 million in deficit. Osten said she has cautioned that lawmakers need to wait and see what effects COVID has on state revenues.

The state ended the fiscal year with a surplus after receiving about $500 million in federal funds earlier than anticipated, reported fewer refunds in 2020 because the filing deadline was extended, and received more income and sales tax revenue than expected, McCaw has said

“I think we are going to be better than we’re seeing,” Osten said. “I don’t know if we’ll end up with a surplus, but it will be better.”

Personal income tax receipts were expected to increase $210 million compared to last month’s projection, which Office of Policy and Management Secretary Melissa McCaw wrote in the forecast was due to healthy estimated payments in September. Expected income tax withholding projections were increased another $50 million.

The forecast also includes a $90.7 million increase in sales and use tax projections, which McCaw wrote continue to exceed targets. It also includes a $70 million improvement in real estate conveyance tax projections, and an $85 million increase in the protection of pass-through entity tax revenues.

“Despite the COVID pandemic, the U.S. stock market is 14.0 percent higher than a year ago as measured by the S&P 500, which should bode well for capital gains realizations,” McCaw wrote of the improved estimate for pass-through entity tax revenues.

State Sen. Kevin Witkos, R-Canton, ranking member of the Finance, Revenue and Bonding Committee, said the improved projections for real estate conveyance tax revenues reflect the confidence of realtors in Fairfield County, where he said homes are selling quickly and above asking price.

McCaw noted that some revenues may look better than earlier projected because of the significant amount of stimulus money the federal government issued to states, businesses and individuals. What happens with further federal stimulus or a potential outbreak, could significantly change projections in the coming months, she wrote.

“Until a vaccine for the COVID virus is widely available, and absent further federal measures to stimulate economic activity, significant challenges may remain over the coming months,” McCaw wrote. “These challenges include reduced demand for air travel and reduced activity in the leisure and hospitality sectors with the onset of cooler weather and the resultant impact on important segments of the state’s economy.”

On the spending side, the October report includes $309.2 million less in projected spending. Part of that comes from the deficit mitigation plan Lamont issued last month, which proposed using 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. OPM spokesman Chris McClure said that is not included in the October projection, but the other $200 million in mitigations that don’t require legislative approval are included.

On top of those, McCaw reported another $334.8 million in “lapses” that would reduce state spending, including $256.2 million from the Department of Social Services, up significantly from last month’s projected $95 million lapse because of the extension of the federal public health emergency, which will enhance federal Medicaid reimbursement through March, reducing costs to the state by $230 million.

Witkos said he hoped some of the savings from lapses due to vacant state positions is due to increased efficiencies from moving more operations to a paperless system, and that they don’t harm the safety net.

Based on the projections, the state would draw $1.32 billion from its “rainy day” budget reserve fund, less than the $1.82 billion Lamont proposed drawing on in his deficit mitigation plan. That would leave the fund – which exceeded $3 billion and its statutory cap of 15 percent of general fund spending this summer – with $1.75 billion going into 2021, when McCaw has said she expects another significant deficit, even before the pandemic.

Witkos said the state shouldn’t simply rely on its reserve fund. He said lawmakers need to address a deficit mitigation plan, and said he hopes to see an updated plan from Lamont after consensus revenue estimates are released in November that will rely less on the rainy day fund.

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