Home Economy Lembo: CT could end FY 2019 (slightly) in the black

Lembo: CT could end FY 2019 (slightly) in the black

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Comptroller Kevin Lembo believes that the state could end fiscal year 2019 with a modest surplus of approximately $164.2 million if some early positive indicators continue throughout the year.

Kevin Lembo
Lembo

In a letter to Gov. Dannel Malloy, Lembo said his projection is slightly lower than that of the state Office of Policy and Management’s most recent projection due to his belief that the cost of legal settlements through the adjudicated claims account could exceed projections.

“It is still very early in the fiscal year and so the state should only rely cautiously on these positive early indicators,” Lembo wrote, “but there are a number of revenue categories performing above expectations, including the estimated and final payment portion of the income tax (by $289.4 million), as well as the sales and use and corporation taxes.”

In last month’s projection, Lembo said the budget was on track to end in balance and declined to project a surplus at that early point in the interest of caution. As each month progresses, revenue and economic indicators are becoming more reliable, but must be monitored, he said.

Lembo added another note of caution that, while the corporate tax is overperforming, the fiscal year 2019 budget established a new pass-through entity tax on certain types of business that will be categorized as corporate tax.

“While the corporate tax is currently ahead of target, the unpredictable nature of the business cycle and the lack of trend data from past years demands close scrutiny as the year progresses,” Lembo said.

Should certain components of the income and corporation taxes continue to realize gains above projections, Lembo said it would not affect the General Fund surplus estimate because, due to a recently enacted volatility cap, those additional gains would be transferred to the Budget Reserve Fund.

Lembo, who authored legislation to establish the cap to assure long-term fiscal responsibility, said the state should target a Budget Reserve Fund amount that is 15 percent of General Fund spending. If current trends continue, Lembo said it could result in another transfer at the end of the year of approximately $684 million to the Budget Reserve Fund, which would bring the year-end balance to just over $2 billion or about 10.7 percent of General Fund expenditures.

“Connecticut’s overall budget results are ultimately dependent upon the performance of the national and state economies,” Lembo said. “Recent trends provide signs for cautious optimism that Connecticut’s economy is gaining strength through the first quarter of fiscal year 2019.”

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