Connecticut’s rainy day fund is helping state stay afloat – but will only go so far

“Obviously, this is the rainy day.”

So said Secretary of the Office of Policy and Management Melissa McCaw on April 2, when the state was busily trying to assess where it stood ”” and where it needed to stand ”” from a fiscal perspective as the Covid-19 pandemic was first heating up.

McCaw made her comment at Gov. Ned Lamont”™s daily briefing, where he declared Connecticut”™s then-$2.5 billion budget reserve fund (also known as the rainy day fund, or RDF) to be “in pretty good shape.”

Theal                                                Levin

As indeed it has been, according to The Pew Charitable Trusts, the Philadelphia-based nonprofit, nongovernmental organization. According to its research, Connecticut ranks ninth out of the 50 states in terms of how long it could operate solely on its RDF: 40.4 days. That may not sound like a lot, but it is certainly better than Pennsylvania”™s 0.3 days or Illinois”™ and Kansas”™ zeroes.

Speaking with the Business Journal, Justin Theal, an officer with Pew”™s State Fiscal Health team, called Connecticut “one of the most financially secure states going into the (current) recession.”

Even with Covid”™s effects ”” expenditures up, receipts down as businesses have at least partially closed and various financial incentives have been offered to help keep companies afloat ”” the state”™s RDF is now near $2.8 billion as state income tax filings, which had been postponed from April 15, began to be filed on July 15.

Where once the Lamont administration was projecting a major economic miasma by the conclusion of the fiscal year that ended July 1, Comptroller Kevin Lembo”™s latest estimate is a $128.1 million deficit ”” nothing to sneeze at, but certainly better than had been feared.

“The governor has said it”™s his intent to use the rainy day fund to help that budget gap,” Theal said. “And there”™s plenty of room to do that this year. But if 2021, ”™22, ”™23 are still facing the same challenges, you”™re not going to have that anymore.”

Pew”™s data indicates that a majority of states learned a painful lesson after being caught short by the Great Recession. At the end of the 2019 fiscal year, states collectively had more dollars saved in their rainy day funds ”” with money that could cover a bigger percentage of state spending ”” than at any time in at least the past 20 years, according to the organization.

Fortunately, Theal said, Connecticut was one of those states. While its RDF was worth less than 2% of its general fund at the end of FY17, it stood at 13% two years later.

Looking ahead, however, is even more of a dice-throw than is usual, due to the uncertainty over where the Covid crisis is headed. Adam Levin, principal associate at The Pew Charitable Trusts, said that revenue has fallen “a lot” in all states, and could continue to do so for the next year or so.

“Most states, including Connecticut, have to have balanced budgets by law,” Levin said, “so there are a limited number of options available to them. Should they tap their resources now or wait for now in the hopes that the situation will get better?”

Other options include the never-palatable combination of raising taxes and cutting services, which usually only further dampens a state”™s economy.

“One of the awkward but, in a way, fortuitous things to happen was that the pandemic hit basically eight months into the fiscal year, when many states were already running a surplus,” Theal said. “The majority of states have not had to rely too, too much on hiking taxes or cutting expenses.”

However, 2021 “is looking like a whole different beast,” he warned. “The entire year could take place under the recession and the lingering effects of the pandemic.”

That could lead to more severe across-the-board cuts in education and aid to local governments, as well as public employee furloughs, just to make ends meet, Theal said.

Still, “Connecticut stands out to me,” Levin said, “because it”™s in a position where it can rely so heavily on its rainy day fund, at least for now.”

And predicting how an economy is going to perform can be prone to inaccuracies in the best of times, he added.

“You have to look at a range of scenarios and base your policy on that. Unfortunately, right now it”™s hard to do that.”