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Despite vanishing federal COVID relief, Connecticut’s coffers swell to record levels

The Connecticut State Capitol Building in Hartford
Sage Ross
The Connecticut State Capitol Building in Hartford

Despite Connecticut families losing hundreds of millions of dollars in federal COVID aid since September, state government’s revenues have swelled to record levels, according to a report released Tuesday.

Increasing income, sales and corporation tax receipts have state finances finishing more than $2.2 billion in the black this fiscal year — a whopping cushion approaching 10% of the entire budget.

That growth also has effectively wiped out any projected shortfall after the next gubernatorial election, when state government also will be weaned off federal pandemic relief.

The consensus projections from budget analysts for the Executive and Legislative branches give Gov. Ned Lamont and incumbent legislators great flexibility to cut taxes as they campaign for re-election, but it’s also sparking increased calls for more services for some hit hardest by the pandemic.

Finance chairman: Wall Street has fared better than Main Street

“I do think that the topic of conversation this session should be: What is the most effective way to help middle and working class families as we deal with year three of COVID,” said Rep. Sean Scanlon, D-Guilford, who co-chairs the legislature’s Finance Committee and is exploring a campaign for state comptroller. “The economy by many metrics is doing well … but we have an economy right now that is working more for Wall Street than for Main Street.”

The latest report bears out Scanlon’s point.

Analysts project state taxes alone will generate nearly $18.5 billion this fiscal year. That’s $600 million more than Lamont and legislators were counting on when they adopted a new state budget last spring, and a big reason — along with surging federal grants and frugal spending during the pandemic — that the General Fund will spend $1.3 billion less than it takes in this year.

The rest of the $2.2 billion surplus involves a special savings program created in 2017 that limits how much income tax revenue tied to investment earnings — a source that fluctuates greatly — can go into the General Fund.

This “volatility adjustment,” which accounts for the rest of this year’s surplus, has been the most robust revenue engine for the state since 2019 — and has grown considerably even since the coronavirus first struck Connecticut in March 2020.

And the good news continues in the next fiscal year, which begins July 1, when analysts forecast another $1.9 billion surplus — nearly $1.2 billion in the traditional budget combined with more than $700 million in excess income tax receipts from investment earnings.

But while the state’s coffers are overflowing, many households have lost ground.

Federal unemployment benefits, which added $300 per week on top of state jobless benefits to hundreds of thousands of households, expired in early September. State labor officials said this federal aid was worth more than $70 million per week, and close to $300 million per month, to Connecticut households last summer.

An expansion of the federal income tax’s child tax credit, which added $1,000 to $1,600 per child for thousands of Connecticut families, ended in December.

Scanlon is one of several officials who already have proposed state tax cuts in the coming year to help low- and middle-income households.

The Guilford lawmaker wants a $600-per-child credit within the state income tax for households making $200,000 per year or less. To ensure poor households — which often owe little or no state income taxes — still could benefit, Scanlon also proposed making 70% of the credit refundable.

Lamont has said he will propose expanding the property tax credit, another income tax provision aimed at working class families.

GOP lawmaker: CT must keep using surpluses to reduce pension debt

Minority Republicans in the Senate want to temporarily roll the state sales tax back from 6.35% to 5.99% and suspend the 1% surcharge on restaurant food and other prepared meals.

Sen. Henri Martin of Bristol, ranking GOP senator on the Finance Committee, said providing some modest tax relief is important, but officials also must continue dedicating most of this projected surplus to reduce Connecticut’s massive pension debt.

Because the state’s rainy day fund, which holds $3.1 billion, already is at its legal maximum at 15% of annual operating costs, any projected surplus not spent on programs or use to fund tax relief would be used to pay down pension debt.

The state has nearly $41 billion in unfunded pension obligations stemming from more than seven decades of inadequate savings, and analysts project this will continue to place pressure on other programs in the budget well into the 2040s.

“I think we stay steady,” Martin said. “I think it would be too premature to make any type of significant changes.”

“We should not view that [revenue growth] as an excuse to forgo the good fiscal discipline that helped get us here,” added Rep. Holly Cheeseman of East Lyme, ranking House Republican on the Finance Committee.

Melissa McCaw, Lamont’s budget director, also was cautiously optimistic Tuesday, noting that state finances for this fiscal year and next combined are supported, in part, with more than $1.75 billion in federal coronavirus aid.

The surging state revenues “give us the ability to reduce this reliance on one-time revenues from the federal government, making progress, albeit not fully, towards a structurally balanced budget … Connecticut has made significant strides to improve its financial standing in the last five years.”

Those “significant strides” are expected to continue for at least a few more years, according to the latest report.

State government is financially ready when federal COVID aid expires

The 2023-24 fiscal year — when federal pandemic relief will have expired — sounds far off, but it’s not.

That fiscal year begins in July 2023, and the winners of this November’s gubernatorial and legislative elections will have to begin working on that budget 13 months from now.

Analysts now project state finances for 2023-24 have a built-in hole of $520 million. But that doesn’t include another $680 million they expect to be captured by the volatility adjustment. Those funds, plus the $3.1 billion in the state’s rainy day fund, would enable the next governor and legislature to easily manage state finances even without lost federal pandemic relief.

And with that problem well in hand, a leader of the legislature’s budget-writing committee said it’s time for Connecticut to bolster some services for its most vulnerable.

Private nonprofit agencies, which provide the bulk of state-sponsored social services, say demand for their programs has surged by 68% since the pandemic began.

The CT Community Nonprofit Alliance, which represents hundreds of these agencies, estimates that after more than a decade of minimum growth in state funding, the industry loses $461 million per year.

Sen. Cathy Osten, co-chairwoman of the legislature’s Appropriations Committee, joined the alliance Tuesday in calling for annual increases in funding over the next five years to close this gap, arguing the state can easily afford to help those who serve the disabled, people struggling with mental illness, and others in need.

“We have always said we valued our nonprofits and we need to show that value, not just by thanking them,” Osten said. “We have to start funding the services at a level that allows them to more than exist but to treat their clients with the respect that we expect them to.”