The economic effects of the COVID-19 pandemic on state revenues will result in at least a $2.7 billion hit to the current two-year budget cycle, according to new estimates, with the Lamont administration saying Connecticut should start seeing a recovery begin by the fiscal year that begins July 1, 2021.
The estimates project net decreases of $582.1 million in general fund revenue for the fiscal year ending June 30, and $2.2 billion for the 2020-21 fiscal year, which begins July 1.
The state Office of Policy and Management (OPM) is anticipating an operating gap of $904 million for the current $21.3 billion budget, while the state Office of Fiscal Analysis (OFA) is predicting a deficit of $958.5 million.
After closing the expected 2020 deficit, reserves are expected to be around $1.9 billion, according to OPM Secretary Melissa McCaw.
That figure includes a $318.1 million transfer of projected 2020 income tax receipts to the rainy day fund.
“The rainy day fund will be a major support in (fiscal) 2021, but it’s estimated to be inadequate,” McCaw said at a press briefing this morning. The fund represents about 13% of the state’s general fund revenues – one of the highest percentages in the country, she said.
“In a traditional environment this forecast would help inform the underlying revenue estimate for the current fiscal year and subsequent year,” McCaw said. “For this year and the out-years, projections are complicated by the uncertainty of the magnitude and duration of this unprecedented public health and economic crisis.
“We believe these estimates are conservative,” she continued, ”and that this approach is fiscally prudent to ensure stability. We will continue to work with our federal partners to unlock additional support for the revenue losses experienced by the state and municipalities.”
Revised 2020 estimates reduced income taxes by $190 million, sales taxes by $303 million and the corporation tax by $126 million.
The updated 2021 estimates predict reductions of about $760.2 million in withholding taxes, $710.6 million in estimated and final payments, and $299.3 million in pass-through entity taxes paid by owners of certain businesses.
OPM and OFA also forecast a $653.7 million decline in sales taxes and a $250.6 million decrease in corporation taxes for FY20-21. The Special Transportation Fund (STF) is projected to see revenue decreases of $164 million this fiscal year and $200 million next fiscal year.
“Economists project that the economic impact will be short in duration,” McCaw noted. “However, the timing of reopening, our businesses’ ability to recover, market conditions, individuals’ ability to re-obtain employment, consumers’ confidence and spending patterns will impact estimates.
“We must now focus on necessary measures to ensure Connecticut financially weathers this storm and is positioned to generate a positive economic future,” she added, saying that discussions with the chairs of the state’s Appropriations, Finance and Revenue committees will begin immediately.
A true picture of the damage to FY20 will not emerge until August or September, McCaw said, while “realistic estimates” for FY21 will probably not be available until November.
Those hoping for further tax cuts will be disappointed, McCaw added.
Lamont: “Sobering” Numbers
Gov. Ned Lamont described the numbers as “sobering” during the press briefing. “COVID has been tough on our physical health, our mental health and our fiscal health.”
The governor further noted that $370 million from the federal government, which had been expected to arrive in time to be applied to FY20, will instead be applied to FY21.
Lamont repeated his hopes that a next federal stimulus bill will include more aid for states and municipalities, as has been pitched by Speaker of the House Nancy Pelosi (D-California), but acknowledged that another stimulus bill has not been finalized.
The governor further said that the STF, which it had been hoped would remain solvent for another three or four years, will “probably run out by July 1 of next year” in the face of the pandemic and the hit on gas tax revenues.
Asked if he might entertain revisiting the contentious issue of highway tolls, Lamont said he would be looking at a number of possible solutions to shore up the STF.
In a joint statement, Senate President Pro Tempore Martin Looney (D-New Haven) and Senate Majority Leader Bob Duff (D-Norwalk) said the revenue estimates “should come as a surprise to no one. American states will lose two-thirds of a trillion dollars in tax revenue over the next three years, according to the Congressional Budget Office – and those states have just $75 billion combined in their rainy day funds.
“Fortunately, due to foresight and smart fiscal policy, Connecticut is in a much better position than most other American states to weather this fiscal downturn, at least in the short term. Connecticut has 47.4 days’ worth of daily expenses in our $2.5 billion rainy day fund; the national average is about half that, or just 28 days, according to the Pew Trusts. For contrast, Massachusetts has 31 days of budget reserves, South Carolina has 24 days, Florida 16 days, Kentucky four days, and Kansas has no budget reserve at all.”
“We still face many difficult months ahead as the tendrils of the COVID-19 pandemic will continue to infect our economy and our recovery,” the senators concluded, “but for the time being, Connecticut is in a stronger position than most states, thanks to our fiscal prudence and the safeguarding of our budget reserve.”